Most people don’t intend to fall behind on their student loans but, according to statistics, a large swath of borrowers end up doing so. In fact, according to The Institute for College Access & Success, nearly 9 million Americans have defaulted on their federal student loans -- and by 2023, a whopping 40 percent of all borrowers might join them.
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Missed payments probably don’t sound like a big deal, but a student loan default can have severe and long-lasting repercussions, influencing things like your credit score, your tax refund, and even the earnings you get from your employer. It could also put you in legal trouble.
What happens if your student loan defaults?
Defaulting essentially means you’ve failed to repay your loan as originally agreed upon. The exact time you move into default depends on the type of loan you have. With federal student loans, for example, you’re considered in default after 270 days without payment. On private loans, it varies, but you might be in default the very day you miss a payment.
Typically, the first thing that happens when you’re at default (or even nearing it), is your lender will report it to all three credit bureaus. This will lower your credit score and make it hard to get credit cards, take out a loan or buy a house.
Your lender will also send your account to collections. According to Liam Hunt, a market analyst at the SophisticatedInvestor.com, this move will have repercussions of its own, particularly with federal loans.
“Collections costs will be added to your outstanding balance, usually valued at 17 to 25 percent of the loan amount,” Hunt said. “The collections agency will then garnish a percentage of your wages—usually 15 percent, and your tax refund will also be garnished after your account has been referred to the Treasury Offset Program.”
It could also put your professional licenses at risk, depending on what state you live in, and you might even face legal consequences—especially if you have private loans. If this occurs, you may owe legal fees as well.
Reasons you should never default on student loans
Obviously, defaulting on your student loans can have some pretty serious fallout, and you’ll want to avoid it all costs if possible.
Here are just a few of the reasons you’ll want to steer clear of it:
1. It will be more expensive in the long run.
First off, you’ll face collections and potential legal fees once you go into default. But more than this? You’ll also pay more in interest. Here’s how Rick Castellano, a spokesperson for student loan company Sallie Mae, explained it: “Interest starts to accrue from the time your loan money is sent to your school. The longer interest isn’t paid, the more it will continue to add up.”
2. You’ll seriously hurt your credit (and maybe your parents', too).
Late payments hurt your score on their own, but defaults can do even worse damage. They’ll actually stay on your report for a full seven years, making it hard to take out credit or get a loan. Credit scores are also often considered by landlords when evaluating tenants, and they can even impact your insurance rates in some states.
If you have a private student loan that a co-signer helped you take out, defaulting also puts their credit at serious risk, too, Castellano said. “Having a co-signer on your loan means that someone—a parent, guardian, grandparent, or other creditworthy individual—was willing to back your education by putting their credit on the line for you,” he said.
3. You could lose out on wages or that tax refund.
When you default on a federal loan, the government can garnish your wages in order to get that money back. That means less on each paycheck until your debt’s been repaid in full. They can also keep your tax refund every year as well.
4. You could be in professional danger.
In some states, you can have your professional or business license revoked when you default on a student loan. People at risk here include nurses, teachers, CPAs, and more.
How to avoid defaulting on your student loans
While these are certainly serious consequences, there are fortunately lots of ways to avoid defaulting in the first place. If you have a federal loan, applying for deferment, forbearance, forgiveness or an income-based repayment plan are smart options. You can also consolidate your loans or refinance them.
If you have a private loan, simply negotiating a new payment may be able to help, as can refinancing or consolidating your loans. You also might consider getting a second job or side hustle, or moving in with a loved one while you bring your loan payments current.
How to get student loans out of default (and know if you’re in default in the first place)
The easiest way to check if you’re in default is to log onto StudentAid.gov. If you have private student loans, you’ll have to contact your lender directly or log into their online portal. You can also pull your credit report to see if any late payments or defaults have been reported.
If you’re already in default, you’ll need to take action right away. For a federal loan in default, you can set up a loan rehabilitation program. This requires nine on-time payments (based on your income) and can help bring your loan current within just 10 months. For private loans, you’ll need to reach out to your lender directly to come up with a repayment plan or settle up your debt with the collections agency they’ve hired to collect your balance.
According to Castellano, just taking action is the most important step. “Just like a mortgage or a car loan, student loans—both federal and private—are legal agreements that you signed, promising to repay the amount you borrowed plus interest,” he said. “There can be legal penalties if you don’t. That’s why ignoring your outstanding loans just makes things worse.”