Defaulted Student Loans? 10 Things You Should Know ASAP!

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Uh oh, are your student loans in default? Don’t freak out, it happens to tons of borrowers. Defaulting on your loans sucks but it doesn’t have to ruin your life.

If you’re not sure what default even means or what happens when you default, this guide will break it down for you. We’ll look at how default impacts your credit, how to get federal loans out of default, and how to rebuild your credit if you’ve already defaulted.

Even if you feel totally lost or overwhelmed, there are options to fix the situation and get back on track financially.

Read on for the full scoop so you can deal with defaulted student loans without having a meltdown.

Table of Contents

1. What is a Student Loan?
2. Consequences of defaulting
3. Difference between federal and private loans
4. Getting federal loans out of default
5. Dealing with private loan default
6. Avoiding default
7. Rebuilding credit after default
8. Monitoring credit reports
9. Getting help
10. Bankruptcy and loan discharge

1. What is a Student Loan?

Student loan default occurs when you are unable to make your scheduled monthly payments on your loans for an extended period of time. With federal loans, your debt typically goes into default if you haven’t made a payment in 270 days.

For private loans, default often happens more quickly after just 90 days of missed payments or delinquency.

When you default, the entire remaining loan balance can become immediately due through a process called acceleration. You also lose eligibility for deferment and forbearance options that could have paused your payments.

Default has serious consequences including damage to your credit score that can last for years, wage garnishment, tax refunds being withheld, and fees charged by collection agencies.

If you are already in default, acting quickly is essential to stop collection activities and get your loans back in good standing. Options like loan rehabilitation and consolidation can help resolve federal loan defaults.

For private loans, you may need to work with your lender or refinance the debt. Avoiding default in the first place should be a top priority by ensuring you have an affordable monthly payment.

2. Consequences of defaulting

Defaulting on your student loans can have serious financial and legal consequences that impact your credit, ability to get federal aid, wages, tax refunds, and more.

Knowing these outcomes can help motivate you to avoid default if possible or get your loans back in good standing quickly if you have already defaulted.

Damage to Credit Score

One of the biggest consequences of defaulting on student loans is harm to your credit score and history.

  • When your loan payments become delinquent, this late payment information will be reported to the three major credit bureaus – Equifax, Experian, and TransUnion. Having multiple late payments can significantly bring down your credit score.
  • Once the loan goes into full default after 270+ days of nonpayment on federal loans, this will also show up on your credit report.
  • A default can slash 100 points or more of your credit score. It remains on your credit history for 7 years from the date the lender assigns the debt to a collection agency.
  • This default label and the missed payments leading up to it make it very difficult to qualify for any kind of credit, from credit cards to auto loans to mortgages. You will also pay higher interest rates even if approved.
  • A low credit score also affects your ability to rent an apartment, get a cell phone plan, buy insurance, and more.

Wage Garnishment

  • When you default on federal student loans, the government can garnish your paycheck without requiring a court order.
  • Up to 15% of your disposable wages can be taken to repay the defaulted debt. This continues until the defaulted balance is paid in full.
  • For private student loans in default, the lender must get a court judgment first in order to garnish wages.

Tax Refunds Withheld

Another consequence of federal student loan default is seized tax refunds. The government can take all or part of your federal tax refund as payment toward the defaulted loans. State tax refunds may also be at risk depending on state law.

Collection Fees Charged

  • When you default, you become responsible for paying collection costs on top of your loan balance.
  • For federal student loans, collection fees can be up to 25% of the loan amount. On a $30,000 loan, that equates to $7,500 in fees.
  • Private loan collectors also charge their own fees, which further increases the debt.

Ineligibility for Aid and Benefits

Consequence Details
No federal student aid You cannot receive additional federal grants, loans, or work-study while in default
Loss of loan repayment options Flexible options like income-driven plans and deferments end when you default
No transcript access Schools can withhold official transcripts until the default is resolved
Ineligible for loan forgiveness Loan forgiveness programs require you to be in good standing
Possible loss of professional license Some professions require you to be current on loans to maintain a license

Aggressive Collections

  • When federal loans default, they are assigned to collection agencies to recover the debt. Expect constant calls and letters demanding payment.
  • Private loan collectors frequently use aggressive tactics like harassment and deception. Know your rights under consumer protection laws.
  • Collectors add their own fees but have the authority to set up repayment plans or settle for less than the full balance.

Entire Balance Due

  • Upon default, the full loan amount plus accumulated interest becomes immediately due through a process called acceleration.
  • You lose access to flexible repayment plans and benefits that could make payments more affordable.
  • With rehab or consolidation, you can get a reasonable monthly payment again and avoid paying the full amount upfront.

Private Loan Consequences

Private student loans default faster than federal, often in just 90 days of delinquency. They offer less flexibility if you default:

  • No standard rehabilitation programs – must negotiate with lender
  • No income-driven repayment options
  • No consolidation to quickly get out of default
  • No eligibility for federal student loan forgiveness programs

Getting private loans out of default requires either refinancing, settling the debt, or working with an attorney. Paying them off in full immediately is very challenging for borrowers already struggling to make payments.

In summary, the impacts of student loan default can be devastating and long-lasting. Acting quickly if you default or miss payments is critical to avoid wage garnishment, collection fees, and credit score damage.

3. Difference between federal and private loans

If you have defaulted or are concerned about defaulting on student loans, it is important to understand the key differences between federal and private student loans. The timeline to default and options available after default vary significantly.

Timeline to Default

Federal and private student loans default on different schedules:

  • Federal loans default after 270 days (9 months) of no payments. Perkins Loans can default after just 1 missed payment.
  • Private loans default faster, usually after 90 days (3 months) of delinquency or 3 missed payments.

Private loans give you a much shorter period before your debt is at risk of default. Carefully review your loan documents to confirm when nonpayment could trigger default.

Options to Get Out of Default

Once in default, federal loans offer structured “cure” options, while private lenders have no standard programs:

  • Federal loans can be rehabilitated or consolidated to get out of default. Rehab removes the default from your credit report after 9 payments. Consolidation lets you quickly regain loan benefits and reasonable payment.
  • Private loans have no mandated rehabilitation or consolidation programs. You must contact your lender and try to negotiate repayment terms or a settlement. Refinancing with another lender is also an option.

This table summarizes the main distinctions:

Federal Loans Private Loans
Time until default 270 days 90 days
Rehabilitation option Yes No
Consolidation option Yes No
Income-driven repayment Available Not available
Forgiveness options Many programs None
Interest rates Fixed Usually variable
Dischargeable in bankruptcy Rarely More often

Collections and Wage Garnishment

  • The federal government directly handles collections on defaulted federal loans, including garnishing wages without a court order.
  • Defaulted private loans must secure a court judgment first before pursuing wage garnishment. The lender or a collection company handles collections.
  • Both federal and private collectors can tack on collection fees, up to 25% of the balance for federal loans.

Impact on Credit and Future Aid

  • For both loan types, default severely hurts your credit scores and remains for 7 years. Missed payments before default also damage your credit profile.
  • Any default on federal loans makes you ineligible for future federal student aid until resolved. Default on private loans does not directly block federal aid eligibility.
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Getting Back in Good Standing

To summarize, federal loans offer borrowers more options and flexibility to get out of default, while private lenders have no standardized rehabilitation or consolidation programs. Understand the nuances between these loan sources if you face default.

4. Getting federal loans out of default

If you have defaulted on federal student loans, the good news is there are specific programs offered by the Department of Education to help get your debt back in good standing.

Have a look at the Fresh Start Program in one of my other posts.

The two main options are loan rehabilitation and loan consolidation.

Loan Rehabilitation

Loan rehabilitation involves making nine on-time payments over 10 months to “rehab” your federal loans out of default.

  • Your monthly payment is set at an affordable amount based on your income and family size, usually around 15% of your discretionary income.
  • After the nine payments are made, the default is removed from your credit report which can help improve your credit score.
  • You regain eligibility for deferments, forbearance, and flexible repayment plans. Collection costs may also be reduced.
  • Only federal Direct and FFEL loans are eligible for rehabilitation, not private loans. You can only rehab a loan once.

Benefits of Rehabilitation

  • Removes default from credit history
  • No upfront payment required
  • Affordable monthly payments
  • Collections stop during and after rehab

Drawbacks of Rehabilitation

  • Takes 10 months to complete the process
  • Any late payments before default remain on a credit report
  • The loan can only be rehabilitated once

Loan Consolidation

Consolidating federal student loans lets you combine multiple federal loans into one new Direct Consolidation Loan.

  • To qualify for loans in default, you must agree to an income-driven repayment plan or make 3 consecutive payments.
  • After consolidating, you regain access to deferments, forbearance, and flexible plans like income-driven repayment.
  • Consolidation does NOT remove the default from your credit history, but future payments will be on time.
  • The process can be completed relatively quickly in 30-60 days.

Benefits of Consolidation

  • Fast way to get out of default
  • Only need to make 3 payments first
  • Can enroll in income-driven repayment

Drawbacks of Consolidation

  • The default remains on a credit report
  • Possible higher interest rate
  • Loss of grace period on some loans
  • No more option to rehabilitate

Weighing the Options

Factor Rehabilitation Consolidation
Time to complete 10 months 1-2 months
Impact on credit Removes default Default remains
Monthly Payment 15% discretionary income Varies

Rehabilitation is generally the best option if you can afford the monthly payments since it removes the default mark from your credit history. If you need to get out of default quickly and resume federal aid access, consolidation may be preferable.

Consult with the Department of Education to determine which path will work best based on your financial situation and future repayment goals.

5. Dealing with private loan default

Defaulting on private student loans can be more challenging to resolve since private lenders do not offer standardized rehabilitation programs. Here are some potential options to get private loans out of default:

Work with Your Lender

  • Contact your lender as soon as you default and explain your financial hardship.
  • Ask about any hardship programs or alternative repayment plans they can offer.
  • Be prepared to provide financial documentation to prove difficulty in making payments.
  • If they refuse to negotiate, firmly request to speak with a supervisor about options.
  • Get any proposed resolution or repayment plan in writing before agreeing.

Refinance the Loan

  • Refinancing involves taking out a new private student loan to pay off the old one.
  • You may need a creditworthy cosigner to qualify if your credit was damaged by the default.
  • This can potentially help you get a lower interest rate or a more manageable monthly payment.
  • Just beware refinancing restarts the clock on payments and interest accumulation.

Settle the Debt

  • Offer to pay a lump sum that is less than the full remaining balance, known as settling.
  • Many lenders will agree to settle because they want to recoup at least part of the unpaid debt.
  • Settlement offers are more successful once the debt is with a collection agency.
  • Get any settlement agreement in writing before sending payment.

File Bankruptcy

  • While rare, it may be possible to discharge or cancel private student loans through bankruptcy.
  • You must file a separate adversary proceeding and prove “undue hardship.”
  • Talk to a bankruptcy attorney experienced with student debt discharge.
  • Bankruptcy damages your credit for 7-10 years but removes the debt.

Consult an Attorney

  • An attorney specializing in student loans can help you assess all options.
  • They can negotiate with the lender or debt collector on your behalf.
  • Legal assistance also helps if you get sued over the defaulted debt.
  • Attorneys often offer free initial consultations so you can decide if hiring one makes sense.

Weigh the Options

Factor Refinance Settlement Bankruptcy
Cost Loan fees Lump sum Attorney fees
Impact on credit Minor Remains Severe damage
Time to resolve 1-2 months < 6 months 6+ months

Refinancing or settling the debt are typically the quickest options, but courtroom bankruptcy discharge provides the cleanest break from payments. Consider both cost and credit impact as you decide on the best path forward.

In summary, dealing with private loan default takes more effort since lenders are not required to offer structured rehabilitation programs. Seek help from a credit counselor or attorney so you can make an informed decision.

6. Avoiding default

The best approach when struggling to repay student loans is to take action before your debt goes into default. Here are proactive steps you can take:

Enroll in Income-Driven Repayment

Income-driven repayment plans through the federal government base your monthly student loan payment on your income and family size. Options include:

  • Income-Based Repayment (IBR): Caps payments at 10-15% of discretionary income. Forgiveness after 20-25 years.
  • Pay As You Earn (PAYE): 10% of discretionary income. Forgiveness after 20 years.
  • Revised Pay As You Earn (REPAYE): 10% of discretionary income. Forgiveness after 20-25 years.
  • Income-Contingent Repayment (ICR): Lesser of 20% discretionary income or fixed payment. Forgiveness after 25 years.

You must recertify your income annually for these plans. Unpaid interest may be added to the principal at recertification.

Request Deferment or Forbearance

If you are facing a temporary financial hardship, deferment or forbearance can suspend your federal loan payments.

  • Deferment pauses payments for 6-12 months due to enrollment, unemployment, economic hardship, etc. Unpaid interest is not added to the principal for subsidized loans but is for unsubsidized loans.
  • Forbearance allows you to temporarily stop or reduce payments for up to 12 months due to financial challenges. Unpaid interest accrues during this time.

These options prevent delinquency from turning into default. However, interest continues accruing, so they are short-term solutions.

Budget and Prioritize Payments

  • Review your full financial situation and create a budget to direct limited funds.
  • Make federal student loans a priority over other debts like credit cards and personal loans since they have more flexible options if you become delinquent.
  • Contact creditors, explain the hardship, and try to negotiate reduced payments if necessary.
  • Consider consolidating credit card balances to lower interest costs.
  • A nonprofit credit counseling agency can also help manage payments.

Talk to Your Loan Servicer

  • Communicate closely with your loan servicer about repayment challenges. Don’t wait until you miss payments.
  • Ask about any available hardship assistance programs and how to qualify.
  • See if they can temporarily lower the required monthly payments.
  • Get detailed documentation of any assistance provided and the next steps.

Seek help as soon as possible, this way, you’ll have more options available. Waiting until you are close to default limits your choices.

7. Rebuilding credit after default

If you have already defaulted on a student loan, it damages your credit significantly. Here are steps to start rebuilding your credit even after default:

Pay All Bills On Time

  • Your payment history makes up 35% of your FICO credit score. Making on-time payments should be a top priority.
  • Set up automatic payments or payment reminders to avoid any missed bills in the future.
  • Bring any open collections current and avoid further accounts being sent to collections.
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Keep Credit Card Balances Low

  • Your credit utilization, or the amount of credit you currently use, makes up 30% of your score.
  • Keep credit card balances as low as possible, preferably below 30% of the credit limit.
  • Pay off cards completely each month if you can. Even $1 counts as a balance.
  • Don’t cancel old accounts as the available credit helps your utilization ratio.

Allow Time to Pass

  • Negative marks like default stay on your credit report for 7 years.
  • As this time passes, the default will hurt your credit score less and less.
  • You can write goodwill letters asking creditors to remove default early, but success is rare.

Mix Types of Credit

  • Having installment loans (mortgage, auto, student loans) and revolving credit (credit cards) improves your credit mix, which is 10% of your score.
  • If you only have student loans and no other credit accounts, consider adding a secured credit card or credit-builder loan to establish a positive payment history.

Don’t Apply for Too Much Credit

  • Each credit application causes a hard inquiry on your report that temporarily lowers your score.
  • Apply for new credit only when needed while rebuilding. Too many applications raise red flags.
  • Limit applications to no more than one every six months.

Correct Credit Report Errors

  • Dispute and correct any inaccurate information on your credit reports that may be dragging down your score.
  • Get copies of your reports from and review them carefully.
  • Submit disputes by mail with evidence of any incorrect info.

Rebuilding credit takes diligence and patience, but responsible behaviors will raise your score over time. Avoid shortcuts that seem too good to be true.

8. Monitoring credit reports

When you have defaulted on a student loan, it is critical to monitor your credit reports and score regularly. Here’s how to check your reports and use them to rebuild credit:

Get Your Free Reports

  • You are entitled to one free copy of your credit report from each bureau (Equifax, Experian, TransUnion) every 12 months at
  • You can also get free weekly online reports and scores from sites like Credit Karma by providing basic personal information.
  • Monitoring services may charge a monthly fee but offer additional features like identity theft monitoring.

Review All Details

Thoroughly check your reports for any errors:

  • Verify personal information like current address is correct.
  • Confirm all open accounts belong to you.
  • Check account status, limits, balances, and payment history for accuracy.
  • Dispute any incorrect or fraudulent information in writing with evidence.

Check the Impact of Default

See how the student loan default is impacting your credit:

  • Note when the default first appears and the reporting date. It stays for 7 years from that date.
  • Check if the missed payments leading to default show as well. These also damage your score but fall off after 7 years from the date of delinquency.
  • Review the section listing loan details like the original amount and current balance.

Watch Credit Score Trends

  • Monitor your credit scores over time to see improvement.
  • Many free services like Credit Karma offer VantageScore 3.0 scores, while paid services can provide FICO scores.
  • Expect slow progress. Correcting errors helps, but time is the biggest factor.

How Frequently to Check

  • Review reports from all three bureaus once annually.
  • Check scores more often, such as monthly or quarterly, to monitor progress.
  • Spread out applications for new credit and only check reports again right before applying.

Regularly monitoring reports ensures the accuracy of your credit history and allows you to track rebuilding efforts after a student loan default. Be patient, as it takes time to see material improvements.

9. Getting help

Dealing with defaulted student loans can feel overwhelming. Seek out guidance from experts and resources that understand repayment and default.

Contact Loan Servicer

Your student loan servicer should be your first stop:

  • Explain your financial situation and inability to make payments.
  • Ask about deferment, forbearance, and flexible repayment options.
  • Have income documents ready if applying for income-driven repayment.
  • Request written confirmation of any agreements made.
  • If unhelpful, file a complaint with the Consumer Financial Protection Bureau.

Credit Counseling Agencies

Nonprofit credit counseling provides free or low-cost consultations:

They help with:

  • Reviewing your full financial situation.
  • Creating debt repayment plans and budgets.
  • Advising on dealing with creditors and collectors.
  • Exploring available default resolution options.
  • Offering student loan counseling.

Seeking Legal Expertise

Consulting a lawyer gives you advocacy and expertise:

  • Helps if the loan servicer does not offer assistance.
  • Assistance managing aggressive collectors and debt lawsuits.
  • Aid negotiating settlement of private student loan debt.
  • Analyzing if bankruptcy discharge of loans is an option.
  • Ensure you understand your rights and responsibilities.

Beware of Scams

Avoid “student loan relief” companies:

  • They charge expensive, unnecessary fees.
  • Claim they can eliminate your loans, which is false.
  • Offer other false promises of loan forgiveness.
  • Getting professional help is wise, but beware of scammers.

You do not have to navigate default alone. Reputable credit experts or lawyers can help find the light at the end of the tunnel.

10. Bankruptcy and loan discharge

For borrowers facing truly dire financial situations, bankruptcy may be an option to discharge student loans. However, this path has strict requirements.

How Bankruptcy Works

  • You file a petition for Chapter 7 bankruptcy to liquidate assets and discharge debts.
  • Chapter 13 bankruptcy sets up a repayment plan over 3-5 years before discharging debts.
  • Both severely damage your credit for 7-10 years after filing.
  • Medical bills, credit cards, personal loans, and other debt can be discharged but not easily student loans.

Requirements to Discharge Student Loans

To qualify for student loan discharge in bankruptcy:

  • You must file a separate adversary proceeding to contest the discharge.
  • The burden is on you to prove repaying would cause “undue hardship.”
  • Courts use tests like the Brunner test requiring good faith effort to repay already.
  • Part of the debt may be discharged, but full discharge is rare.

Private vs. Federal Loans

  • Private student loans are easier to discharge than federal.
  • Federal loans require meeting stringent standards few borrowers can reach.
  • Talk to an experienced bankruptcy attorney about the likelihood of discharge.

Consequences of Student Loan Bankruptcy

While bankruptcy can eliminate student loan debt, expect the following consequences:

  • Bankruptcy damages your credit for 7-10 years just like default.
  • Any non-discharged debt remains along with defaults if applicable.
  • You may still face collections and lawsuits from creditors of discharged debt.
  • If loans are discharged, the amount discharged will count as taxable income.
  • Significant legal costs including attorney fees to pursue this complex process.
  • Discharged loans are no longer eligible for income-driven repayment or loan forgiveness programs.

Is Bankruptcy Right for You?

Bankruptcy to eliminate student loans should be carefully considered due to harsh outcomes. Weigh the long-term credit damage and costs against the benefit of shedding the debt burden.

Thoroughly discuss options with an attorney first.

For most borrowers struggling with repayment, bankruptcy will not be the appropriate solution.


I hope this guide provided a helpful overview of what happens when student loans default and how to respond. Please note that I am an AI assistant without financial expertise.

The information I can provide is educational but does not constitute professional financial advice.

Dealing with student loan default is highly complex, with long-term impacts on your finances and credit. The best approach is to be proactive and take steps to avoid default if possible. But if you are already in default, explore your options and next steps with care and urgency.

Be wary of companies making bold claims that they can easily fix your situation. There are no quick fixes or shortcuts when loans are in default. Improvement takes time and discipline.

Seek guidance from nonprofit credit counselors, your loan servicer, or attorneys specializing in student debt. They can help create realistic plans tailored to your circumstances.

With patience and diligence, it is possible to recover from student loan default. But the process is not easy or fast. My advice is to obtain personal guidance from trustworthy experts.

Relying solely on general information online is risky, as every situation is unique.

Please take care when making decisions about your student loans and reach out for assistance.

I wish you the very best in getting your finances back on track.

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