Ibrahim Gardner
Defaulting on a student loan means that you have failed to repay your loan as outlined in the loan's contract, or the promissory note. Defaulting on federal student loans can lead to various consequences, including the withholding of Social Security payments, tax refunds, or wage garnishment. It is important to understand that defaulting on a federal student loan can result in the loan being turned over to a collection agency, and the borrower may become liable for associated costs such as court fees and attorney fees. Additionally, defaulted loans can appear on your credit history, impacting future loan and credit card applications. To address a defaulted loan, borrowers can explore options like loan rehabilitation, consolidation, or income-driven repayment plans. It is recommended to consult with the lender about available options and to make timely payments to avoid default.
Defaulted student loan characteristics and values table
| Characteristics | Values |
|---|---|
| Definition of default | Failure to repay a loan according to the terms agreed to in the promissory note |
| Time to default | Federal student loans: roughly 270-360 days past due; Federal Perkins loans: immediately after missing a payment; Private student loans: after 3 missed monthly payments or 90 days total |
| Consequences | Collections agencies can withhold Social Security payments, tax refunds, or take part of paychecks; Difficulty obtaining other loans or credit cards; Loss of federal financial aid eligibility |
| Options to get out of default | Loan rehabilitation, consolidation, extended repayment plans, income-driven repayment plans, deferment, forbearance |
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What You'll Learn
Loan rehabilitation and consolidation
Loan Rehabilitation
Loan rehabilitation involves making a series of on-time payments to rehabilitate the loan. This process can take at least nine months and must be done for each loan individually. Loan rehabilitation can remove the default from your credit record and halt wage garnishment even after it has started. It can also remove most collection fees once the rehabilitation process is complete. However, late payments will remain on your credit report.
Loan Consolidation
Loan consolidation, on the other hand, involves taking out a new Direct Consolidation Loan to pay off the defaulted debt. This option can be faster than rehabilitation, but it will not remove the default from your credit history. You cannot consolidate your loans if your wages are already being garnished or if it appears likely that they will be garnished within the next month. Consolidation also increases your total loan amount because the new loan will include accrued interest and collection fees. However, it can simplify repayment by combining multiple loans into one and provide more repayment plan choices.
It is important to carefully consider the pros and cons of each option before deciding which one is the best fit for your financial situation.
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Default consequences
Defaulting on a student loan means that you have not made payments as outlined in the loan's contract, or promissory note. The consequences of defaulting on a federal student loan include:
- Collections agencies can withhold your Social Security payments and tax refunds, or take part of your paychecks.
- Credit reporting companies are notified, which generally results in a lower credit score for you.
- You may not receive additional federal student aid until you take steps to bring your federal student loan out of default.
The U.S. Department of Education's Fresh Start Program is a one-time initiative to help borrowers get their federal student loans out of default. Borrowers can also consider loan rehabilitation and consolidation to get federal student loans out of default. Delinquent federal student loans are also eligible for postponements and repayment plans that could make payments more affordable, such as income-driven repayment, deferment, and forbearance.
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Federal vs. private loans
Defaulting on a student loan means that you have not made payments as outlined in the loan's contract, or promissory note. Federal student loans typically enter default when payments are roughly nine months, or 270 days, overdue. Federal Perkins loans can default immediately if a scheduled payment is missed. Private student loans often default after three missed monthly payments, or 90 days in total, but some may default after just one missed payment.
Federal student loans are issued by the US Department of Education or, in some cases, the federal government. Private student loans are issued by banks, credit unions, and other financial institutions. Federal loans are generally the smarter first choice for borrowers, as they are easier to qualify for and offer more flexible support. They also offer benefits such as loan forgiveness and income-driven repayment plans. Private student loans may offer better terms for graduate or professional students, or parents, with strong credit. They also offer more choice in interest rates and repayment options, such as interest-only or fixed payments while you are in school.
To apply for a federal student loan, you must complete the Free Application for Federal Student Aid (FAFSA). This also determines your eligibility for other federal student aid, such as grants and work-study. Private student loans require a credit check, and those with no credit history or poor credit will typically need to apply with a cosigner.
Both federal and private student loans have their own eligibility criteria, application process, and terms and conditions. It is important to understand what you are signing, as student loans are legal agreements.
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Repayment options
Defaulting on a student loan means that you have not made payments as outlined in your loan's contract, or promissory note. Default rates increase with overborrowing, and federal student loans usually enter default when payments are roughly nine months, or 270–360 days, past due.
If you are having trouble making payments due to an income deficit, your lender may be able to suggest alternate repayment options, such as:
- Extended repayment
- Graduated repayment
- Income-sensitive repayment
- Income-contingent repayment
- Income-based repayment
You can also consider using a consolidation loan to combine all of your educational loans into one big loan. Federal loans have more flexible repayment options and harsher penalties for default. Before federal student loans default, they enter a status known as delinquency, and these delinquent federal student loans are eligible for postponements and repayment plans that could make payments more affordable, such as:
- Income-driven repayment
- Deferment
- Forbearance
If you are behind on your federal student loan payments and are being contacted by a debt collector, you may be able to arrange repayment options to get out of default. An income-driven repayment plan called Saving on a Valuable Education (SAVE) plan has unique benefits that lower payments for many borrowers.
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Getting loans out of default
Defaulting on a student loan means that you have not made payments as outlined in the loan's contract, also known as its promissory note. The consequences of defaulting on a student loan can include collections agencies withholding your Social Security payments and tax refunds or taking part of your paychecks. Your credit score will also take a hit, and you may be unable to continue your education or return to school because you will lose eligibility for additional federal student aid.
There are several ways to get your student loans out of default:
- Repay the loans in full: This is often not a practical option for most borrowers.
- Loan rehabilitation: This involves making nine payments within 20 days of the due date over ten months. After rehabilitating your defaulted loans, the default is removed from your credit history, but your credit reports will still reflect the late payments.
- Loan consolidation: Almost all federal student loans can be consolidated into a single federal Direct Consolidation Loan. This is typically faster and cheaper than rehabilitation, and you don't have to pay fees. However, loan consolidation won't result in the removal of the default from your credit history.
- Fresh Start program: This program was announced by the Department of Education to help borrowers get out of default quickly and easily before collections begin again. It is a time-limited program that will run until one year after the payment pause ends.
- Negotiate a settlement: If you have private student loans, you might be able to negotiate a lump-sum settlement with your lender, paying less than you owe.
It's important to contact your loan servicer to discuss these options and find the best solution for your situation. Additionally, watch out for student loan forgiveness scams claiming to wipe out your defaulted loans for a small fee.
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Frequently asked questions
Defaulting on a student loan means that you have failed to repay the loan according to the terms agreed to in the promissory note. This typically means that you have not made a payment in 270-360 days.
Defaulting on a student loan can have serious consequences. Your loans may be turned over to a collection agency, which can withhold your Social Security payments and tax refunds or take part of your paychecks. You may also be sued for the entire amount of the loan, and it will be difficult for you to obtain other loans or credit cards.
If you have defaulted on a federal student loan, you may be able to arrange repayment options to get out of default, such as loan rehabilitation, consolidation, or an income-driven repayment plan.
