Ibrahim Gardner
Defaulting on student loans is a serious matter with severe consequences. It occurs when you do not make payments as outlined in your loan contract, and it can lead to collection agencies withholding your Social Security payments, tax refunds, or part of your paychecks. To get out of default, you must make arrangements with your loan servicer or lender to repay, and there are options like loan rehabilitation, consolidation, deferment, and forbearance. With millions of borrowers in default, the U.S. Department of Education has also taken steps to help borrowers get back into repayment, such as providing clear information about their payment options and urging them to contact the Default Resolution Group.
| Characteristics | Values |
|---|---|
| Number of borrowers in default | 5 million |
| Percentage of federal student loan portfolio in default | 25% |
| Percentage of borrowers in repayment and current on their student loans | 38% |
| Average number of days after which federal student loans enter default | 270 |
| Number of days after which Federal Perkins loans default | 0 |
| Average number of days after which private student loans default | 90 |
| Status of federal student loans before they enter default | Delinquency |
| Options to get federal student loans out of default | Loan rehabilitation, consolidation, repayment |
| Consequence of default | Loss of professional license |
| Action taken by federal student loan holders if no payment arrangement is made | Place defaulted student loans with a collection agency |
| Action taken by private student loan holders if no payment arrangement is made | Considered "charged off" or uncollectible, sold to a collection agency |
| Action to be taken by borrowers in default | Contact the Default Resolution Group to make a monthly payment, enroll in an income-driven repayment plan, or sign up for loan rehabilitation |
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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 remove the default status from your credit record. It takes at least nine full months for loans to come out of default, and you must rehabilitate each loan individually. The repayment plan can be income-driven. This process can help borrowers restore their credit, but it can also take longer than consolidation.
Loan Consolidation
Loan consolidation involves taking out a new Direct Consolidation Loan to pay off your defaulted debt. You can consolidate most types of federal student loans, and your new single loan will be in good standing as long as you make on-time payments. This option is much faster than rehabilitation, taking between six to eight weeks to complete. It can also be used to simplify repayment if you have multiple loans, even if you are not behind on payments. However, if you are using consolidation to get out of default, you must either make three full on-time monthly payments consecutively and voluntarily on the defaulted loan(s) before consolidating, or agree to repay your new loan using an income-driven repayment plan.
It's important to carefully consider the pros and cons of each option before deciding which is best for your unique financial situation.
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Involuntary collections activities
The US Department of Education's Office of Federal Student Aid (FSA) resumed collections of its defaulted federal student loan portfolio on May 5, 2025, after a pause since March 2020. The FSA will restart the Treasury Offset Program, allowing for various involuntary collection activities. These include garnishing wages, withholding tax refunds, and seizing portions of Social Security checks and other benefit payments. For example, the Treasury Offset Program can withhold up to 15% of federal salaries, up to 15% of Social Security benefits, and up to 25% of federal retirement payments.
Borrowers who are behind on their required payments should take advantage of options to manage their loans, such as enrolling in an income-driven repayment plan or loan rehabilitation. They should also contact the government's Default Resolution Group to discuss repayment options and avoid involuntary collections.
The Department of Education has stated that the resumption of collections is intended to protect taxpayers from bearing the cost of federal student loans. However, critics argue that the government's actions contradict affordability arguments and put borrowers in economic limbo, making it difficult for them to manage their financial obligations.
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Wage garnishment
The amount that can be garnished is limited by law. The federal government can garnish up to 15% of your disposable income or after-tax pay. This means that you must be left with an amount greater than 30 times the federal minimum hourly wage ($7.25), which equates to $217.50 per week. The Social Security Administration can also withhold up to 15% of your Social Security income to cover delinquent student loan debt through the Treasury Offset Program. Private lenders can garnish up to 25% of your weekly disposable income, depending on your earnings and location.
To avoid wage garnishment, you can take several steps. One option is to pay off the defaulted loan amount in full, which stops the government or private lender from garnishing your wages. You can also negotiate new repayment terms or loan rehabilitation, or consider loan consolidation, where your old debt is replaced with a new loan in good standing. Additionally, you may be eligible for deferment or forbearance, which pauses your loan payments.
If you receive a wage garnishment notification, you can request a hearing within 30 days. The hearing can be conducted in person or by phone, and if successful, your wages may not be garnished for a 12-month period or you may qualify for a reduced garnishment rate. During the hearing, you can provide proof to support your objections to the debt or garnishment, but you will need to arrange your own legal representation.
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Forbearance and deferment
During forbearance, your loan payments are postponed or reduced, providing temporary relief if you are unable to meet your repayment schedule. Whether your loans are subsidized or unsubsidized, interest will continue to accrue during forbearance. If you do not pay the interest as it accumulates, it will be capitalized, increasing the total amount you owe.
On the other hand, deferment allows you to temporarily pause payments on your loan. If you had a subsidized loan, you will not be charged interest during the deferment period. However, if your loan is unsubsidized, you will be responsible for the interest. You have the option to pay the interest as it accrues or allow it to be capitalized, which will increase the amount you have to repay.
It is important to understand the consequences of defaulting on your student loans. Default occurs when you fail to make payments according to the terms of your promissory note. The financial institution that owns your loan, your loan guarantor, and the federal government may take action to recover the debt. Your default status may be reported to national credit bureaus, damaging your credit rating and impacting future purchases or loans. You may also become ineligible for additional federal student aid if you decide to pursue further education.
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Collection agencies
If you default on your federal student loan debt, your tax refunds, a portion of your wages, and even some of your Social Security benefits may be seized by the federal government. This means that the government can take these steps without going to court, and there is no statute of limitations on collecting federal student loan debts.
The Treasury Offset Program, administered by the US Department of Treasury, is another tool used by the government to collect on defaulted federal student loans. This program allows the government to offset or reduce a borrower's tax refunds, social security benefits, or other federal payments to cover the loan payments.
It's important to act quickly if you fall behind on student loan payments to avoid default. While it may be challenging to recover from default, it is possible. Borrowers have the right to fight back against debt collection agency harassment or abuse and can report any issues to the Department of Education and the Consumer Financial Protection Bureau.
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Frequently asked questions
For federal student loans, a default usually occurs when payments are roughly nine months, or 270 days, past due. 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.
If you default on your student loan, the lender or guarantor may use a collection agency to collect the loan. Your professional license can also be suspended, and your lender can sue you to repay your loans.
To get out of default, you need to make arrangements with your servicer or lender to repay the loan. You can also consider loan rehabilitation, consolidation, or repayment.
Loan rehabilitation involves making six consecutive full voluntary on-time payments. The payments must be "reasonable and affordable", taking into account the borrower's disposable income and financial circumstances.
If you are thinking about defaulting on your student loans, ask your lender whether you are eligible for a deferment or forbearance. During forbearance, the lender may allow you to postpone or reduce your payments, but interest charges will continue to accrue.
