Delinquency paves the way to default when it comes to repaying student loans, and millions of Americans who borrowed to fund their postsecondary education find themselves on that problematic path each year.
About 15% of all individual student loans are in default at any given time, with more than a million student loans entering default annually, according to the Education Data Initiative. As of December 2021, the independent research team reports, nearly 8% of all student loan debt was in default to the tune of $124.4 billion.
The default numbers are higher when it comes to federal student loans, which accounted for nearly 93% of all student loans in the first quarter of 2022 and typically have more generous repayment terms than private student loans. According to a 2021 survey for The Pew Charitable Trusts that focused on undergraduate borrowers who took out their first federal student loans between 1998 and 2018, 35% have defaulted and two-thirds of that group have defaulted more than once.
Failing to properly repay federal student loans, which are funded by taxpayers and administered by the U.S. Department of Education, invites severe consequences ranging from wage garnishment – in which the government withholds a percentage of your paycheck – to seizure of income tax refunds. But it doesn’t have to get to that point, experts say.
“I’ve been working in the student loan industry for decades, with thousands of borrowers on both the compliance and advocacy sides. I can count on one hand the number of people who couldn’t be helped,” says Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit that provides free advice and resources to student loan borrowers. “There’s almost always a solution to help keep people from defaulting on their federal student loans.”
Here’s what you need to know about federal student loan delinquency and default, how to avoid both scenarios and what you can do if they occur.
What Is Federal Student Loan Delinquency?
Delinquency occurs when a payment on a student loan is past due, whether it’s missed completely or even just one day late. It means that the borrower has broken a contract – called a promissory note – to repay the loan according to terms.
After 90 days of nonpayment, the student loan servicer typically reports the borrower’s delinquency to the three major U.S. consumer credit bureaus: TransUnion, Equifax and Experian. This can result in a dip in the borrower’s credit score, which can reduce future chances of getting credit and cause higher interest rates on future loans.
The credit agencies get updates every 30 days, so the negative effect on a delinquent borrower’s credit score could become worse the longer a loan is delinquent. Also, late fees may be assessed, adding to the debt.
If you are delinquent for 240 days, expect a letter from your student loan servicer giving you 30 days to pay the loan and related costs in full. For most student loans, once you’re delinquent 270 days, you enter default.
“If you think you can’t afford payments now,” Mayotte says, “you really can’t afford a default.”
What Is Federal Student Loan Default?
Ignoring your delinquency status and communication from the servicer usually leads to default, experts say. Compared to private student loans, which usually have a shorter window before default, federal student loans provide significant time and more options to take preventive steps.
Consequences of Federal Student Loan Default
By the time you default, it’s too late for other options such as deferment, forbearance or an income-driven repayment plan that could have significantly lowered your monthly payments.
When you default, a cascade of consequences can occur:
- The loan servicer or holder can demand immediate full payment of the entire loan balance.
- The interest owed on the loan is immediately capitalized, meaning that it is added to the principal amount of the loan – and the now-larger loan keeps accruing interest.
- You lose the ability to choose another payment plan, deferment or forbearance.
- The loan can be sent to a collection agency, which will add more fees and may sue you in court, meaning additional cost to you.
- You lose eligibility for future federal student financial aid, including work-study.
- You can be taken to court and held liable for not just the defaulted loan, interest and fees, but also court costs, attorney fees and other collection expenses.
- If you fail to strike a new payment agreement, the federal government can garnish up to 15% of your disposable pay, seize your federal and state income tax refunds – called “Treasury offset” – and in most cases withhold some of your Social Security benefit payments.
In addition, a professional license can be revoked, suspended or denied in some states if you default on a student loan. And a default may stay on your credit report for seven years, affecting your ability to borrow for major purchases such as a car or home.
How to Avoid Federal Student Loan Delinquency and Default
Avoiding student loan delinquency and default begins before you even start college, experts say. They recommend being cost-conscious when selecting a field of study and a school, and seriously weighing the return on investment for the credential you hope to earn.
“Families often make college choice an emotional choice,” Mayotte says, noting that many students change their college or major at some point “no matter how passionate a student is about a school.”
“Look at ROI,” she advises. “It’s not all or nothing. Some (students) attend a lower school the first two years and then transfer to their dream school for the final two years. That can save money. And there’s nothing wrong with going part-time. If money becomes an issue, can you still take one class rather than withdrawing? It might take longer to get the degree, but you will get it.”
Considering life goals when seeking the best educational match has financial implications, says Dana Kelly, vice president of professional development and institutional compliance at the National Association of Student Financial Aid Administrators. Desire to finish a degree is another factor in school fit, she adds, noting that students who drop out are more likely to default.
“You go to college with a plan for your future, right? And a four-year degree may not be the right plan, so don’t allow yourself to be sort of forced into that if maybe there is a community college program that better suits your needs and is less expensive,” Kelly says. “Certainly, the right educational fit is important because if you’re not happy in the pursuit of your degree, you’re probably not going to finish.”
Sound financial practices such as budgeting and paying bills on time can also set borrowers up for success when they begin repaying student loans, experts say, as well as staying in touch with the loan servicer, understanding repayment options and automating monthly payments.
“A habit is important,” Mayotte says. “There’s a lot of data out there that shows that people who tend to be the most successful at paying their loans are those who are in the habit of making a payment each month.”
If you begin to struggle financially or anticipate trouble making a loan payment on time, contact the servicer immediately and see if you qualify for a reduced payment plan, deferment or forbearance, experts recommend.
A deferment or forbearance allows you to temporarily stop making payments.
“The pro of forbearance, I tell my clients, is to bide your time a little bit,” says Trent Graham, program performance and quality assurance specialist at GreenPath Financial Wellness, a national nonprofit organization that provides financial counseling and education. “Sometimes you can get 12 months in forbearance. And more than once. It kind of pushes (repayment) down the road a little bit, helps you in the short term in the hopes you will be in a better situation later. It also protects your credit better so you can focus on some other bills and maybe pay off some other things in the interim.”
Graham notes, however, that loan interest still accrues during forbearance – it doesn’t for deferment, except on unsubsidized federal student loans – so your balance will be higher at the end of the nonpayment period unless you were paying the interest during it.
Forbearance should be used “more judiciously” than deferment, Kelly says, but “it’s better than going into default or becoming delinquent.”
Getting familiar with helpful information on loan servicers’ websites and on StudentAid.gov, a federal Education Department website, can help borrowers avoid delinquency and default, experts say.
“You don’t have to navigate all of that by yourself,” Kelly says. “You can call the servicer and ask for the help you’ll need and you’ll get it. Ignorance and denial are probably the two worst things to associate with your student loans, because those are the two things that are going to get you into trouble.”
How to Get Out of Federal Student Loan Default
Default is a dire situation, but there are ways to recover. If you can’t find a way to pay the debt in full, consider rehabilitation or consolidation, two options with requirements that vary depending on the type of loan.
With rehabilitation, you agree to make nine monthly payments that the loan holder considers “reasonable” and “affordable” over 10 consecutive months. Student loan rehabilitation helps you regain more benefits – such as deferment and forbearance – than loan consolidation.
Consolidation allows you to pay off the defaulted loan or loans with one new loan. To qualify, you must agree to either repay the new direct consolidation loan under an income-driven repayment plan or make three consecutive, on-time monthly payments in full on the defaulted loan before it is consolidated.
Borrowers are more likely to successfully get out of default if they work with student loan servicers and others who can help, experts say.
“In the student loan realm, servicers want – everyone that’s involved in education wants – the individual to be successful, as long as you’re giving them the opportunity to help,” Kelly says. “You don’t want to wait until it’s so bad that there’s not much that can be done.”
Graham cites a case where a borrower got out of default in nine months – with monthly payments of $5 – under an income-driven repayment plan that she qualified for.
“My biggest thing in counseling over 30 years is don’t be afraid, even if you’ve run into default, to contact your servicer,” Graham says. “They’re trying to help you any way they can, and if they have any resource they’re gonna find it for you to help you pay back that student loan.”
Federal student loan servicers are paid a fixed amount per loan regardless of its balance, and the fee structures in their government contracts financially incentivize them to help borrowers stay in good standing.
Reevaluating your loan payment schedule every year – especially if you’re on an income-driven plan, which requires annual verification – is critical because you may be better off making a change, Mayotte says.
“’Set it and forget it’ isn’t necessarily the wisest way to go,” she says. “So reevaluate the loan strategy on an annual basis, preferably at tax time. I want to see people reevaluate their student loans at tax time the way people check their smoke detectors at daylight savings time. Because tax time is when you have all your documents in front of you.”
