Lori Meadows
Failing to pay your federal student loans can have serious consequences. While it might take some time, it is possible to restore your defaulted loans to good standing. If you've defaulted on a federal student loan, you have three options to cure your debt: pay the outstanding balance and interest in full, qualify for a consolidation loan, or rehabilitate your account. Defaulting on student loans can lead to serious legal and financial repercussions, including wage garnishment, withholding of tax refunds, and the potential ineligibility for further federal student aid. Additionally, your credit score will likely take a hit, which can impact your future financial health and ability to borrow money. It's important to understand your loan terms and seek advice from a financial advisor or legal professional if you struggle to make payments.
| Characteristics | Values |
|---|---|
| Credit score impact | Your credit score will take a hit |
| Debt classification | Debt is classified as delinquent after 90 days, and in default after 270 days |
| Loan options | Federal loans have mandated remedies for default, while private loans do not |
| Loan forgiveness | Loan forgiveness programs can eliminate part or all of your loan if you meet certain conditions |
| Wage garnishment | The federal government can garnish up to 15% of your disposable income |
| Tax refunds | Tax refunds may be withheld or garnished |
| Federal benefit payments | Federal benefit payments may be withheld or garnished |
| Further federal student aid | Defaulting may result in ineligibility for further federal student aid |
| Legal action | Defaulting can lead to serious legal repercussions |
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What You'll Learn
Your credit score will take a hit
Federal student loans can have a significant impact on your credit score. Payment history is the most crucial factor that credit scoring companies like FICO and VantageScore consider when calculating credit scores. Therefore, paying your student loan bill on time every month is essential for building your credit.
If you miss a payment, your credit score will likely take a hit once your credit report shows a delinquency. The more overdue your payment is, the worse the damage to your credit. For federal student loans, servicers wait at least 90 days to report late payments to one or all of the three major credit bureaus. However, even one missed payment can lower your credit score, and late payments can stay on your credit report for up to seven years.
If your federal student loan goes into default, which typically occurs after 270 days of non-payment, your credit score will be further damaged. At this point, your relief options become more limited, and getting your loan out of default should be a top priority. While it is possible to restore your defaulted loan to good standing, it may take some time and effort.
It is important to note that federal student loans do not require a credit check for most types, including all federal loans for undergraduates. However, federal direct PLUS loans, available to graduate and professional students and parents of dependent undergraduate students, do require a hard credit inquiry, which may lower your credit score.
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You may face legal action
Failing to pay your federal student loans can have serious legal and financial repercussions. If you fail to make your scheduled loan payments for at least 270 days, your federal student loans enter a state of default, enabling your creditor to take legal action against you to recover the debt.
One possible legal consequence is wage garnishment, where a percentage of your earnings is automatically directed toward repaying the loan. In the case of federal student loans, your loan servicer can garnish your wages, taking up to 15% of your paychecks once you enter default, without requiring a court order. The federal government can garnish up to 15% of your disposable income without a court judgment.
Another legal consequence is a lawsuit. In some extreme federal student loan cases, the government can withhold your income tax refund, social security benefits, or federal benefit payments. This process is known as a treasury offset or refund offset, and it is a measure only federal loan servicers can use.
Additionally, your loan servicer can send your account to a collections agency, which will do its best to make you pay, within the boundaries of the Fair Debt Collection Practices Act (FDCPA). Debt collectors may also add fees to cover the cost of collecting the money.
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Your wages may be garnished
Failing to pay your student loan within 90 days classifies the debt as delinquent, which means your credit rating will take a hit. After 270 days, the loan is in default and may be transferred to a collection agency. When you default, the entire balance becomes due immediately. If you can't pay, your wages may be garnished. Wage garnishment is a legal proceeding where an employer is required to withhold a percentage of a worker's pay to repay their student loan debt. The federal government can garnish your wages or other sources of income, such as Social Security, after you default on a student loan.
The Department of Education will notify you 65 days prior to beginning "offset," which is the process of withholding your government payments to satisfy your debt. You must take one of the following actions within those 65 days to avoid offset: enter a repayment agreement and make the first payment within 65 days, or rehabilitate your loan by making nine on-time monthly payments to get your loans out of default.
You can also negotiate repayment terms with the U.S. Department of Education or the collection agency assigned to your account. For this to work, you must make your first payment no later than 30 days from the day the wage garnishment notice was sent. With federal student loans, you may also object to wage garnishment and ask for an official hearing. During the hearing, you may be able to avoid wage garnishment or have the amount reduced for the following reasons:
- You don't believe the student loan belongs to you or it was taken out without your consent.
- A wage garnishment of 15% of your pay would produce an extreme financial hardship, such as being unable to afford rent or a mortgage.
- You were laid off from work and have been employed in a new role for less than 12 months.
If your hearing is successful, the court may elect not to garnish your wages, or it may agree to a reduced garnishment percentage. If your hearing is unsuccessful, the original garnishment amount will apply.
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You may become ineligible for further federal student aid
Failing to repay your federal student loan can have serious consequences. One of the possible repercussions is becoming ineligible for further federal student aid. This is because, to qualify for federal student aid, you must not be in default on a federal student loan or owe money on a federal student grant.
The U.S. Department of Education determines eligibility for federal student aid based on the Free Application for Federal Student Aid (FAFSA). The FAFSA must be submitted each year to determine eligibility for federal financial aid. If there are any changes to your situation that could impact your eligibility, such as defaulting on a federal student loan, you may become ineligible for further federal student aid.
It is important to note that federal student loans are guaranteed by the federal government, which can act as a debt collector. Failing to repay your loan can result in your loan being transferred to a collection agency, damaging your credit score, and impacting your eligibility for future federal student aid.
If you are struggling to repay your federal student loan, it is recommended to contact your lender and explore alternative repayment plans or federal programs that may be available to assist you. Taking proactive measures to address repayment challenges can help prevent negative consequences, including ineligibility for further federal student aid.
While defaulting on federal student loans can have significant repercussions, there are resources available to help borrowers manage their debt and maintain their eligibility for future federal student assistance. It is crucial to stay in communication with your lender and seek guidance from the U.S. Department of Education or your school's financial aid office to explore available options.
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You may be offered a consolidation loan
If you have federal student loans, you have the option to consolidate some or all of them into a Federal Direct Consolidation Loan. This loan has a fixed interest rate that is calculated as the weighted average of the interest rates of the loans being consolidated, rounded up to the nearest one-eighth of a percent. While consolidating your loans may slightly increase your interest rate, it will lock you into a fixed rate, so your payments won't change over time if they're based on a standard repayment plan.
When you consolidate your loans, any unpaid interest is capitalised, meaning it is added to your principal balance. This new, higher principal balance is what you will pay interest on. Depending on how much unpaid interest you have, consolidation can cost you more over the life of your loan. However, if you pay off some or all of your unpaid interest before consolidating, you can avoid these added interest costs.
Consolidating your federal student loans can also provide certain benefits and protections, such as Public Service Loan Forgiveness (PSLF), which can eliminate your balance after 120 qualifying payments (10 years). Additionally, consolidating your loans can lower your monthly payment by extending the length of the repayment term, although this may increase the total loan cost. You may also be able to release a co-signer from your existing student loan, depending on the terms of the consolidation loan.
It is important to carefully evaluate the terms of a potential consolidation loan before making a decision. Consider the APR, as the monthly payment on your new loan may be lower, but the interest rate could be higher if the loan term is spread out over more years. Additionally, consolidating your loans may have tax consequences, as the refinanced loan may no longer qualify for the student loan interest tax deduction. If you are a servicemember on active duty, consolidating your loans will cause you to lose the ability to qualify for an interest-rate reduction under the Servicemembers Civil Relief Act (SCRA).
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