Student Loan Default: What Is Student Loan Default?

When you’re in college, it’s easy to think that your student loan debt is just a number on paper and not something that will affect your life. After all, how much can $50,000 really cost? But when it comes time to start paying off those loans and your salary isn’t quite what you expected it would be after graduation, reality starts to set in.   

No one wants to default on their student loans. But sometimes, it happens. If you find yourself in this position, don’t despair – there are still ways on how to get out of student loan default.  

The first step is to understand your options out of this situation. You can rehabilitate your loans, consolidate your loans, or agree to a repayment plan. Each option has its own benefits and drawbacks, so it’s important to choose the one that’s right for you.   

Once you’ve decided how to handle your defaulted loans, it’s time to take action. Start by contacting your loan servicer. Then, make a plan to get back on track. With a little effort, you can recover from student loan default and get back on the path to success.  

What Exactly Is Student Loan Default?

Let’s first answer what exactly is a student loan default before we go even further with this discussion.  

When a borrower fails to make payments on their loans as agreed, the loan is said to be in “default.” This can happen if you make late payments, miss payments, or stop making payments altogether. Default on a student loan has some serious consequences that can lead to wage garnishment, legal action, and damage to your credit score. It’s different from other types of debt in that it isn’t dischargeable through bankruptcy and this makes it very important for you to do everything possible to avoid default procedure.  

As stated, your credit score will be negatively affected by this, which can make it difficult for you to buy a house, get a car, or even find a job. You may also be subject to wage garnishment, meaning the government can take money out of your paycheck to repay your debt. And, if you default on a federal student loan, the entire balance of your loan may become due and payable immediately.  

If you’re struggling to make payments on your loan, there are options available to help you avoid default. We recommend you contact your lender to discuss these options, including deferment or forbearance, which temporarily postpone or reduce your payments. There is also a possibility for income-driven repayment plans, which base your payment amount on your income and family size. Or consolidation, which combines multiple federal student loans into one new loan with a single monthly payment.  

In case your loan has already gone into default, it’s not too late to turn things around. You can for example try to repay your debt in full at any time (although you may be responsible for additional fees and interest).   

Federal Student Default

Since the beginning of 2010, federal student loan default rates have increased dramatically at all types of colleges. It went from 9% to 13% in just a few years, and this percentage continues to grow.  

Default on a federal student loan occurs when you have failed to make your student loan payments for 270 days. This can have a major negative impact on your credit score and finances, making it difficult to qualify for new loans or lines of credit. Default also incurs significant fees and can lead to wage garnishment.   

If you default on these loans, the entire balance of the loan will become immediately due and payable. The government can then take action to collect the debt, including tax refund offsets, and withholding money from your Social Security benefits.  

Private Student Loan Default

Student loan default rate for private loans has a similar trend to federal ones. With these loans, the percentage rose to around 10% in just a few years.  

If you have a private student loan, a default can be much more damaging than it would be if you had taken out government loans. Unlike government-backed loans, which are guaranteed and backed by the federal government, private student loans are not protected by any type of insurance. This means that if you default on your loan, you will likely owe the full amount to the lender, bank, or other financial institution.   

Private lenders may, and likely will take legal action against you if you are unable to pay them back.  

How to Know If Your Student Loans Are in Default?

If you are unsure whether your student loan is in default, contact your lender and ask them directly. You can also check your credit report to see if any of your student loans are listed as delinquent.   

Additionally, you can check with NSLDS by visiting their website. The only thing required from students who want access is their name and date of birth so that they can verify their identity before granting access to the system.  

No matter which route you choose to take, it’s important to stay in regular communication with your loan servicer to be sure you are keeping up with the payments. 

What Happens If You Default on a Student Loan?

When you default on a student loan, the consequences are severe. They also differ depending if you took out a federal or private loan, to begin with. You will be charged late fees, also the interest on the amount you owe, and your loan may be reported to the credit bureaus.  

This will also have a negative impact on your credit score and may result in wage garnishment or legal action. Your loan will also become due immediately and you will be responsible for the entire balance plus any interest. If you are unable to repay your loan, you should always contact the lender and let them know.  

How to Recover from Student Loan Default?

By now, we have thoroughly covered what defaulting on a loan means and what the consequences are, but how to actually get your student loan out of default? And how to recover from it?  

The first step in recovering is probably by now obvious, and that’s calling your loan servicer. Your loan servicer is the company that handles the billing and payments for your student loans. They will be able to help you understand your options for getting out of default and getting back on track with repayment.  

They may be willing to offer you a choice from several other repayment plans available. This should help you make affordable monthly payments. Your loan servicer can also help you choose a repayment plan that fits your budget and financial circumstances the best.  

Another option may be student loan default consolidation. Consolidation allows you to combine multiple federal student loans into one new loan with a single monthly payment. This can make repayment more affordable and help you keep track a lot easier.  

Lastly, there is also default rehabilitation. This is a process where you make 9 consecutive monthly payments (on time) to rehabilitate your loans and remove the default status from your credit report.  

Federal Student Loan Default

All the previous strategies we mentioned can be used for federal student loans. In general, these loans are better because they are more flexible and there is a government backing up your loan.

Additionally, with these government-backed-up loans, you can also try to qualify for student loan default forgiveness if you fulfill certain requirements.

One of the options that you should first consider is to try to rehabilitate your loan by making nine voluntary, on-time monthly payments within 20 days of their due date. Once you have completed the rehabilitation program, your default status will be removed from the report. This can be a good option if you are unable to repay your loan in full, which many people cannot do.

You can also talk to your lender about some other payment plans you can actually stick to until you don’t get a better job and more financial freedom.

Private Student Loan Default

Private student loans are not eligible for the same protections as federal loans. If you default on a private student loan, there are fewer options available to help you get back on track. Some private lenders will work with borrowers who demonstrate good-faith efforts to repay the debt, but many do not.  

Private student loan debt is not eligible for federal income-based repayment plans or Public Service Loan Forgiveness (PSLF). These programs can reduce monthly payments and forgive remaining balances after 10 years of payments made through an income-driven plan or while working in public service. Private lenders typically don’t offer these programs so people with these loans are left out in the cold when it comes to getting relief from high monthly payments and forgiving remaining balances. 

However, the lender may still be open to working with you and making a new plan you can follow. Don’t forget to look into consolidation or refinancing your loan. This will give you a new loan with a lower interest rate and monthly payments.   

No matter what option you choose, it’s important to stay in communication with your lender and make sure you’re making timely payments. With some effort, you can get back on track and avoid further damage to your credit score. 

How to Prevent Defaulting on Your Student Loans

Now you know what happens if you default on a student loan, but how to prevent it?  

If you’re struggling to repay your student loans, you’re not alone. In fact, more than 1 million borrowers default on their student loans each year.  

Fortunately, there are ways to prevent this from happening. First of all, before you even take out a loan think of the following:  

• Make sure you understand the terms of your loan. The term “student loan” is actually a bit misleading. There are many different types of loans and repayment options for students and parents alike. If you don’t know what type of loan you need and what type of repayment plan goes along with it, this could become an issue in the future.  

• Pay your student loans on time. This seems obvious, but if you are currently struggling financially, try asking your parents or friends to lend you some money so you do not fall behind. Failure to make payments on time can lead to late fees that add up over time so it can be even harder to pay it off after you miss a couple of payments.   

Other options of course include the ones we already talked about, like talking to a lender or trying to enroll in an income-driven repayment plan, getting forbearance or deferment options, etc. You can also consider consolidating your loans or refinancing your debt.  

Bottom Line

Student loan defaulting is a serious problem that can have long-term consequences. However, by understanding the different types of federal and private student loans and knowing your repayment options, you can avoid falling into this trap. It’s also important to understand what happens if you default on your loan so that you know what steps need to be taken in order to recover from it.  

If you have fallen behind on your payments, there are ways to get out of student loan default. Remember that just taking action can help reduce the penalties associated with this default.