Defaulting on your federal student loans is different than defaulting on another kind of debt you owe, like a credit card or a mortgage loan. With those types of debts, you’re in default if you miss just one payment. But federal student loans are another story. You go into default on most federal student loans after a series of missed payments. So, the good news is that you typically get to miss quite a few payments before you’re considered in default. The bad news is that the consequences of defaulting on federal student loans can be more severe than with other kinds of debts. (To learn about the different ways creditors can collect on defaulted debts, see Creditors' Legal Rights.)
In this article, you'll learn what happens after you stop making payments on your federal student loans, the consequences of being in default, and your options for getting out of default.
What Happens When You Miss a Few Payments
If you’re between one and three months late in paying your federal student loans, the servicer will tack late fees on to your account, and you could risk losing certain loan forgiveness options, like public service loan forgiveness. (Under the public service loan forgiveness program, your loans are forgiven if you make 120 qualifying monthly payments, no later than 15 days after your due date, under a qualifying repayment plan while working full-time for a qualifying employer.)
During this time, the servicer will try to contact you via phone and letters to discuss different repayment options. But your credit score won’t drop. When it comes to federal student loans, the servicer won’t report your loan as late to the credit reporting agencies until the payment is more than 90 days late.
What It Means to Default: You've Missed a Lot of Payments
With most federal student loans (including Direct Loans), if your loan payments are due monthly, you go into default after not making any payments for 270 days, around nine months' worth. If your payments are due less often than monthly, default happens after 330 days of missed payments, about 11 months. With a Perkins loan, though, you go into default as soon as you miss a payment.
After you go into default, the loan is then accelerated, which means the entire unpaid loan balance—not just the payments you’ve missed—immediately comes due.
Consequences of Defaulting on Your Federal Student Loans
If you’re in default on your federal student loans, you could face some serious consequences.
- Your defaulted loan will likely be assigned to a debt collector.
- The government can garnish your wages—up to 15% of your disposable pay—without getting a court judgment first. (Other types of creditors have to get a court judgment before garnishing your wages.)
- If your wages can’t be garnished, perhaps because you’re self-employed, you could be sued for the amount due, plus court costs, collection fees, attorneys' fees, and other costs associated with the collection process.
- You’re no longer eligible for deferment and perhaps forbearance, and you lose eligibility for other benefits, like the ability to choose a repayment plan.
- Your tax refunds and federal benefits, like Social Security, could be seized.
- You might not be able to renew a professional license you hold.
- Your credit score will go down even further. Remember, the servicer will probably start reporting the loan as delinquent after 90 days, which damages your score. Once your credit gets dinged, it becomes more difficult to qualify for a mortgage loan, car loan, or credit card, or you might get charged a higher interest rate on any of those kinds of debts. You also might have a hard time getting a job if you have bad credit. Of course, this depends on the employer.
- You might not be able to continue your education or return to school because you lose eligibility for additional federal student aid.
- Your school can withhold your academic transcript.
How to Get Out of Default
You have several options for getting out of default: You can repay the loans in full (not a practical option for most borrowers), rehabilitate the defaulted loans, or consolidate them.
Loan Rehabilitation
To rehabilitate a defaulted student loan, you have to make nine payments within 20 days of the due date over ten months. The servicer sets the payment amount. Once you've made the required payments, your loans will no longer be in default. You can rehabilitate a loan only once.
After rehabilitating your defaulted loans, the default is removed from your credit history. But your credit reports will still reflect the late payments.
Loan Consolidation
Almost all federal student loans can be consolidated into a federal Direct Consolidation Loan. With a consolidation loan, you combine multiple loans into a single loan.
Consolidation is typically a faster and cheaper way to get out of default than rehabilitation. You don’t have to pay fees to consolidate your loan, and because consolidation will likely be completed relatively quickly, you’ll pay less in collection fees than under a rehabilitation plan. Loan consolidation, however, won’t result in the removal of the default from your credit history.
Getting Help
Contact your loan servicer to find out more about the various ways to get out of default discussed in this article. If after talking to your servicer you still need more information about these options—or if you need help dealing with your servicer—consider contacting a consumer protection attorney who has experience dealing with student loan issues.
