Student loan default: What every borrower should know

Whether you’re struggling to make your monthly payments or you’re faced with a sudden financial hardship, continuously missing your student loan payments can lead to default. Falling into student loan default isn’t as rare as you might think. As many as 4.6 million federal Direct Loan borrowers are in default, according to a recent Federal Student Aid report.

Default can complicate your financial situation in many different ways. Staying on top of your payments is the best way to avoid it. However, if you find yourself in this situation, it’s also important to know your options going forward.

What is student loan default?

Student loan default is a status on your debt account indicating that you failed to repay your loan based on the terms of your agreement. It can occur with both private and federal student loans after you miss a payment, though each loan type has its own process and timelines.

Typically, one missed or partial payment isn’t enough to get your account into default. In this situation, your loan might be considered “delinquent.” However, ongoing delinquency can lead to default. Your federal loan servicer will typically report delinquent payments to the credit bureaus after you miss a payment for 90 days.

For most federal student loans, if you don’t make your scheduled payment 270 days past the due date, your servicer will declare the loan to be in default. This timeline ensures that servicers do their due diligence in communicating with you about your payment before putting loans into default. Note that federal Perkins Loans can go into default immediately after missing one payment.

For private student loans, default can happen much faster. Generally, private lenders place loans in default after 90 days of consecutive nonpayment. They may also report a late payment to the credit bureaus after 30 days past the scheduled due date.

Consequences of student loan default

Student loan default has short- and long-term consequences that affect your aid options and future financial situation, including:

• Damages your credit: Loan holders report default data to the national credit bureaus. A default is a negative mark on your credit report and can lower your credit score.
• Accelerates loan due date: When student loans go into default, you may lose installment plan privileges and the entire amount owed can become due immediately.
• Loss of federal loan protections: Defaulting on federal loans means you’re ineligible for federal deferment and forbearance. You also don’t qualify for benefits like flexible income-driven repayment plans or loan forgiveness.
• Can’t borrow future federal loans: A federal student loan default also makes you ineligible for new federal loans. This can be a major consequence if you plan on returning to school and relying on federal aid.
• Legal actions and collections: Loan holders can make efforts to sue you in court to collect the owed debt, or send the defaulted loan to a third-party debt collector.
• Wages and federal payouts withheld: If you default on a federal loan, any federal payouts, like tax refunds and Social Security benefits, can be withheld to pay down your debt. Your wages might also be directly garnished through your employer.
• Challenges with future financing opportunities: Having a student loan default on your record can make it harder to get approved for other consumer loans, like a mortgage or car loan. If you are approved for a future loan, your interest rates might be high due to the default.

Related: How do student loans affect my credit score? 

7 ways to get out of default

Despite your best efforts, life happens and unexpected situations can cause you to default on your student loans. Here are some potential solutions to help get your loans back in good standing.

Federal student loans

There are four ways to move forward if you’ve defaulted on federal loans:

1. Fresh Start program: This temporary program lets you immediately pause collections, access federal aid, and report your loan status as “current” with the credit bureaus. It also gives you another chance at loan rehabilitation if you’ve already rehabilitated a loan in the past or need to rehabilitate again in the future. Once enrolled, you can regain access to income-driven repayment plans, forgiveness, and temporary forbearance and deferment. Fresh Start currently runs through September 2024.
2. Rehabilitation: Loan rehabilitation is a one-time option that removes a default record from your credit profile, and helps you regain access to federal benefits and future aid. Depending on your federal loan type, this process involves making nine consecutive monthly payments over a period of 10 months. The amount you pay is set by your loan holder. Note that the Fresh Start program has temporarily replaced rehabilitation. Once Fresh Start ends, borrowers can use loan rehabilitation again.
3. Loan consolidation: A Direct Consolidation Loan pays off your defaulted loan and creates a new consolidated loan. To consolidate, you can make three consecutive monthly payments in full and on time. The amount of these payments will be determined by your loan holder. The other option is agreeing to pay back the Direct Consolidation Loan through an income-driven repayment plan. Note that when you consolidate, accrued interest is added to your principal balance, meaning you'll be charged interest on a higher amount.
4. Pay the full amount: The easiest and fastest way to get out of federal student loan default is by making a lump-sum payment for the full amount that’s owed.

Private student loans

Getting out of default for private student loans is a different process. There aren’t standardized programs specifically designed to get you out of default, but there are a few options:

1. Dispute the debt: The first thing to do if a debt collection agency contacts you is to request a debt validation notice. Debt collectors are required to give you a notice with information about your debt, such as the creditor’s name, amount owed, and the date of the last payment it received. If you don’t believe the debt is yours, if it has already been paid in full, or is past its statute of limitations, send a written dispute to the collector within 30 days. Once sent, they can no longer make collection efforts until they verify the debt.
2. Consult a lawyer: If you’re dealing with a complex student loan default situation, consider working with a debt attorney for guidance. They can help you understand your borrower rights and options for your specific situation.
3. Negotiate a debt settlement: Your lender or debt collector may be willing to accept a lump-sum settlement payment for a reduced amount. Just be wary of companies that charge fees for debt settlement services. As they negotiate with your creditor, these companies may advise you to stop making payments to the lender, and instead, have you save money separately for your lump-sum payment. During this period, your lender will report the default to credit bureaus, and you could incur additional fees and interest if the lender refuses to settle. There’s also no guarantee that the loan holder will agree to a reduced amount.

How to prevent student loan default

If you know you'll have trouble making student loan payments and default is a possibility, take action as soon as you can. You might be able to arrange temporary low or paused payments, or another payment plan entirely, with your lender or servicer. 

For example, federal loan borrowers can request an income-driven repayment plan with a monthly payment as low as $0, if eligible. You may also be able to get a deferment or forbearance if you contact your loan servicer.

If you have private student loans, consider refinancing them if you can qualify for a better interest rate and terms. You may be able to lower your monthly payments and cut your overall student loan costs through a refinance loan. Just keep in mind that refinancing federal loans will cause you to lose access to federal benefits like loan forgiveness and income-driven repayment plans.

Ultimately, the best way to avoid student loan default is being transparent with your loan holder as soon as you know you’ll struggle with making payments.