What happens if you default on student loans?

Federal student loan payments resumed in October 2023 after roughly a three year pause. If you’re struggling to keep up with your monthly payments, you’re not alone. Only 60% of the 22 million borrowers with payments due in October paid these charges by mid-November according to recent Department of Education data.

If you’ve failed to make payments on your student loans, you could be at risk of defaulting. Defaulting on student loans happens when you miss several consecutive payments, leading to a breach of the agreed-upon repayment schedule. 

Here’s what happens if you miss a payment on federal student loans: 

• After 1 missed payment: Federal loans are typically considered delinquent as soon as you miss a payment. Perkins loans can go into default as soon as you miss one payment. 
• After 90 days of no payment: Your loan servicer reports the delinquent status to the three major credit bureaus: TransUnion, Equifax, and Experian. At this point, you're at risk of defaulting.
• After 270 days of no payment: Your federal student loan is officially in default status.

What happens if I default on federal student loans?

Defaulting on student loans comes with serious consequences that can negatively impact your finances in multiple ways.

• Loan acceleration: This means the entire balance of your loan and all accrued interest becomes due immediately.
• Wage garnishment: The Department of Education can force your employer to withhold a portion of each paycheck to pay down your loan balance.
• Seized tax refunds and federal benefit payments: Your federal income tax refund, Social Security benefits, and other federal payments can be seized and applied to your outstanding balance.
• Loss of federal aid: While your loan is in default, you can’t take advantage of deferment, forbearance, or loan forgiveness. You also can’t qualify for other financial aid, such as a new federal student loan.
• Credit damage: Once your loan servicer reports your defaulted student loans to the credit bureaus, your credit score could drop, affecting your ability to qualify for loans, credit cards, and other financial products.
• Collection costs: The federal government may charge collection costs, including attorney’s fees and other court charges.
• Legal action: The federal government may take legal action to collect on defaulted student loans.

What happens if I default on private student loans? 

Although rules for defaulting on private student loans differ from those for federal student loans, they have many of the same consequences. These consequences can include damage to your credit, loan acceleration, collection action, legal action, and adding collection costs to your loan balance. Note that private lenders generally can’t garnish your wages or seize your tax refund without a court order.

Related: Federal vs. private student loans

What to do if you’re at risk of default

If you’re at risk of having your student loans go into default, it’s essential to take action right away. Here’s what you can do: 

• Contact your lender: Reach out to your loan servicer, explain your situation, and express your willingness to find a solution. Your lender can provide information about your options such as deferring your loans, and guide you through next steps.
• Switch repayment plans: If you have federal student loans, your lender may recommend switching to an income-driven repayment plan if you qualify. These plans base monthly payments on your discretionary income and family size, and in some cases, your payments could be as low as $0 per month.
• Refinance private student loans: If you’re at risk of defaulting on your private student loans, refinancing could help you save on interest and also extend the loan term so your monthly payments become lower and more manageable. 

Keep in mind that refinancing federal student loans with a private lender means losing federal benefits and protections, such as access to income-driven repayment plans and loan forgiveness programs.

Related: Should I refinance my student loans?

How to get out of student loan default

The fastest way to get out of student loan default is to pay your student loan balance in full. When you pay off the entire balance, it immediately resolves the default status of your loan. Of course, if you could afford to do that, your loan probably wouldn’t be in default status to begin with. Consider the strategies below if repaying the loan in full isn’t an option.

Enroll in the Fresh Start program

If your federal student loans defaulted before September 1, 2023, you might be eligible for the Fresh Start program. This temporary program helps you restore your student loans to good standing easily and quickly, removing the defaulted record from your credit report.

There are a few ways to sign up for Fresh Start, including signing up online or contacting the U.S. Department of Education’s Default Resolution Group:

• By phone at 1-800-621-3115, or
• Via mail at Default Resolution Group, P.O. Box 5609, Greenville, TX 75403.

After you apply, it takes roughly four to six weeks for the defaulted loan to transfer to a non-default loan servicer. Your loan goes back to “in repayment” status, and the default record is removed from your credit report. You’ll need to make monthly payments from that point forward to avoid having your loans go into default again. You can enroll in an income-driven repayment plan to make your payments affordable.

Rehabilitate your loan

The Fresh Start program temporarily replaced the loan rehabilitation process, which will be an option again after Fresh Start ends in September 2024. Rehabilitation is a process that allows borrowers to restore their federal student loans to good standing. Note, that you can only rehabilitate a student loan once. 

To rehabilitate a loan, you need to work with your loan servicer to establish a reasonable and affordable repayment plan and make a series of nine consecutive, on-time payments over the course of 10 months. Once you’ve made the required payments, your loan is considered rehabilitated, and the default is removed from your credit report. 

Consolidate federal student loans 

Another option is loan consolidation, where one or more federal student loans are combined into a single Direct Consolidation Loan. Consolidation won’t erase the default history from your credit report, but it can simplify repayment by offering a single monthly payment. In order to consolidate your defaulted loans, you must:

• Agree to enroll in an income-driven repayment plan to repay the new consolidated loan, OR
• Make three full back-to-back monthly payments on your defaulted loan before consolidating it.

Once you consolidate your loans, you’ll be eligible for benefits like deferment, forbearance, and possibly student loan forgiveness through programs like Public Service Loan Forgiveness (PSLF).