What You Need to Know about Student Loan Default

The average federal student loan balance is more than $37,000, and those with private student loans average almost $55,000 in debt, according to the nonprofit Education Data Initiative. It’s no surprise that student loan debt can get out of control.

Unfortunately, many Americans are unable to pay back their debt. The Education Data Initiative found that one in 10 Americans has defaulted on a student loan. Additionally, 5% of all student loan debt is in default.

If you are unable to pay back your student loans and worried about defaulting, you are not alone. Getting ahead of the process is the best course of action but, even if you have defaulted, you have options for recovery.

Student loan default means you have failed to make payments on your student loans for a specified period of time, which is outlined in the terms of your loan. The exact timeline may vary depending on your lender. According to Matt Newlin, a higher education consultant, the typical period is 270 days.

“Default can result in the garnishing of wages, withholding federal tax refunds and it can significantly affect your credit score for seven to 10 years,” Newlin adds.

This is because your lender will report the default to the three major credit bureaus, which negatively impacts your credit score.

When you fail to make a payment on your student loan debt, you enter delinquency. This is the first step toward loan default, but it’s not quite the same thing.

Your lender will inform both you and the credit bureaus if your loan is delinquent, and you will be given a set period of time to pay the money you owe plus any late fees – for federal loans, this is typically about nine months. After that time period has passed, your student loans are in default. This is when a lender can pursue legal action.

Your lender has likely contacted you to attempt to secure payment if you have a student loan in default. For federal loans, you can also log into your student aid account to see the current status of your loans. For a private loan, you’ll need to contact your lender.

When a student loan goes into default, you will likely be notified that:

Student loan default has disastrous consequences, not limited to wage garnishment and a plummeting credit score. Whenever possible, it is better to prevent your loans from going into default in the first place than trying to deal with these results.

You have options available to you, but you’ll have to actively seek them out, advises Newlin. “Partial payments typically help avoid or delay default, but that requires communication and follow-up with the servicer,” he says.

Consider these options if you are worried about loan default:

“If they haven’t yet defaulted, yet fear that they might, borrowers can switch repayment plans to a potentially lower monthly payment,” says Jack Wang, wealth advisor at Innovative Advisory Group.

Federal student loan consolidation can extend your repayment term, which can lower your payments to keep you out of default. Keep in mind that extending your repayment term makes the loan more expensive to repay over time.

“For those struggling to get out of student loan debt, I suggest a strategy that is often overlooked and can be quite impactful – seeing if your current employer is willing to provide support and if not, researching prospective employers who do offer student loan repayment assistance,” advises Patricia Roberts, COO of Gift of College, a college gift registry site.

Roberts says employers are often able to make contributions toward loan debt, thanks to the CARES Act of 2020.

“If you’re experiencing financial hardship, ask for temporary relief like forbearance or deferment, if you qualify,” advises Newlin.

Student loan deferment and forbearance are two ways to delay making payments on your loan balance when money is tight. You’ll have to meet certain criteria to qualify – such as demonstrating financial hardship or experiencing a medical emergency – but you can’t qualify for either once you’re in default, so consider these options before you reach that point.

Even with these options available, you might default on your student loans. There are four main options for getting out of student loan default.

Until Sept. 30, 2024, students with defaulted federal student loans have access to a program called Fresh Start from the U.S. Department of Education. If you qualify for the program, you’ll automatically receive benefits such as restoring access to federal student aid. You’ll work with the program to transfer your defaulted loans to a loan servicer and enroll in a repayment plan you can afford, based on your income. Your default will also be removed from your credit report.

Loan rehabilitation is a good choice for getting out of student loan default as it removes the negative mark from your credit report, says Wang.

This government program allows you to get out of debt with nine affordable monthly payments. According to Newlin, the process can take several months to get approved for participation.

Loan consolidation is still available to borrowers in default but, unlike loan rehabilitation, it does not remove the default from your credit report. “Consolidating your loans is another option, but not all loans qualify. Borrowers should contact their servicer(s) to find out if their loans qualify for consolidation,” Newlin says.

Wang adds that this option won’t be available to borrowers with only one loan.

When you default on student loans, your entire balance is due. You can get out of default by paying that balance. Realistically, few people will be able to pay their loans in full if they have reached the point of default.

“If they had the cash, they probably wouldn’t be in default,” says Wang.

Discharging student loans in bankruptcy is difficult, but not impossible. It requires proving undue hardship and filing an additional adversary proceeding. You’ll have to file for Chapter 7 or Chapter 13 bankruptcy – which negatively impacts your credit score – and then work with a bankruptcy attorney to file for student loan discharge.

Student loan debt can be debilitating, and it’s important to remember that many other Americans are struggling with it as well. If you are in a situation where you can’t repay your loans, explore the many resources available to you. According to Newlin, student loan servicers are required by law to provide counseling about all of your loan repayment options

“Most financial aid offices are happy to work with alumni who are no longer enrolled,” Newlin adds. “If you’re struggling with repayment and your servicer isn’t helpful, contact your college’s financial aid office and ask for help. Financial aid counselors are able to review your total loan debt and walk you through repayment strategies, even if you’ve already graduated.”