What happens if you default on a student loan?

Student loan defaults are common. Here’s what happens when you default — and how to come back from it. (iStock)

The number of people who default on student loans is declining, but you’d probably still be surprised by the stats. According to the U.S Department of Education, just over one in every 10 college students defaults on their loans—and that’s just within two years of entering their repayment period.

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A longer-term study from nonprofit policy organization the Brookings Institution showed defaults are even more common a few years down the road. The class entering college in 1996, for example, had a 15 percent rate of default within 20 years. The class of 2004? They’re projected to default at a rate of 25.7 percent.

What does it mean to default on student loans?

Defaulting on a student loan simply means you failed to repay it. The exact point that you move from just being "late" on your payments to going into "default" varies by loan product. On most federal loans (except for Perkins loans), defaulting is when you're behind on payments for at least 270 days. On private loans, you’d have to ask your lender.

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People might default on their loans due to:

  • Changes in employment or loss of income
  • High levels of other debts
  • Medical bills
  • Unexpected emergency costs

Students who attend for-profit universities are more likely to default on their loans than other student groups, according to the Brooking Institute study. Among for-profit students, 23.5 percent had defaulted on their loans within 12 years of entering school. Other groups at higher risk of defaulting include black students, Hispanic students, and students earning no degree or only a certification. Private, nonprofit schools also present a higher risk than public ones, according to the study.

What happens when a student loan defaults?

There are huge consequences for those who default on student loans. Primarily, your loan balance will accelerate, meaning the whole balance will be due in full immediately.

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If you can’t settle up, you might:

  • Lose any deferment, forbearance, and income-based repayment options
  • Lose eligibility for any future financial aid
  • Forfeit all tax refunds and federal benefit payments until the balance is repaid
  • Have your wages garnished, which means your employer may send a portion of your paycheck to your lender
  • Be taken to court by your lender and charged for any court costs, legal fees, collections expenses and more (as well as your full loan balance)
  • Have your academic transcript withheld until your student debt is repaid

You’ll also see your credit score impacted. Though there’s not a hard-and-fast number of points you’ll see your score drop by, Rod Griffin, director of consumer education at Experian, said the impact will be “major.”

“Defaulting on student loans can have a negative impact on your financial health,” Griffin said. “If you've defaulted on student loans, it means you're not paying back your debt as agreed. Missed student loan payments and loans in default can have a major negative effect on your credit scores.”

It’s not just a near-term impact either. The default will stay on your credit report for seven years, reducing your chances of getting a loan, buying a car or purchasing a house, among other things. Credit scores are sometimes used on rental applications and in setting insurance rates, too, so the impact can be sweeping.

What to do if you default on your loans

The stats are clear: Defaulting on student loans is pretty common. But there’s a lot you can do to prevent it. If you do find yourself in a spot where making your monthly payments is hard, you have options. Just make sure you act fast to avoid default and the consequences that come with it.

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If you’re having trouble repaying your loans, take these steps:

  1. Contact your servicer and ask about options. You might be eligible for an income-based repayment plan, forbearance or deferment until you get back on your feet.
  2. Consider a direct consolidation loan. A Direct Consolidation Loan allows you to combine all your federal student loans into a single one. This can cut down on the number of payments you make and potentially lower your interest rate as well, thus making your payments smaller and easier to manage.
  3. Refinance your loans. Refinancing can be a smart debt relief method, especially if you have both federal and private student loans. For one, it can combine your loans into a single, once-a-month payment. It might also get you a lower interest rate or a longer repayment term, both of which would lower your monthly costs.

In the event you’ve already defaulted on your student loans, you should still talk to your lender. There may be a way you can get back in good standing before the default wreaks its havoc on your credit profile.

Some lenders may offer what’s called loan rehabilitation, which allows you to make small yet consistent monthly payments for a set period of time to bring the loan current. Though not all lenders offer this, there’s a good chance your lender has at least some sort of reparative option you can leverage, so call them up and get on the straight-and-narrow before it’s too late.