How to navigate student loan default

Continuously missing your student loan payments can lead to default, and it's not as rare as you may think. As many as 4.6 million American federal student loan borrowers are in default, according to a recent Federal Student Aid report.

Defaulted student loans can complicate your financial situation, casting a shadow over future opportunities and your overall financial health. The best way to avoid it is being transparent with your loan holder as soon as you know you'll struggle with making payments. Here's how student loan default works, how to navigate it, and strategies to recover.

What is student loan default?

Higher education student loan default is a status on your debt account indicating that you failed to repay your loan based on the terms of your agreement. It can happen with both private and federal student loans after you miss a payment, but each type of loan has its own process and timelines. Typically, one missed or partial payment isn't enough to get your account from good standing to bad. In this situation, your education loan might be considered "delinquent." However, ongoing delinquency can lead to default.

How does default happen?

Your federal loan servicer will typically report delinquent payments to the major credit bureaus after you miss a payment for 90 days. For most federal student loans, if you don't make your scheduled payment 270 days past the due date, your servicer will declare the loan to be in default. This timeline ensures that servicers do their due diligence in communicating with you about your payment before putting loans into default. Note that federal Perkins Loans can go into default immediately after missing one payment.

For private student loans, default can happen much faster. Generally, private lenders place loans in default after 90 days of consecutive non-payment. They may also report a late payment to the credit bureaus after 30 days past the scheduled due date, instead of 90 days.

How to check for defaulted loans

To check if you have federal student loans in default, log in to your StudentAid.gov account and view the repayment status of your loan. You can call the Federal Student Aid Information Center (FSAIC) at 1-800-433-3243 for more assistance. If you have private student debt, pull your credit report and look for the payment status on your loans - a default will appear as a "D" on your credit report.

What happens if I default on a student loan?

Student loan default has short- and long-term consequences that affect your aid options and future financial situation, including:

• Damaged credit: Loan holders report default data to the national credit bureaus, which can seriously impact your credit. A default is a negative mark on your credit report and can lower your credit score.
• Accelerated loan due date: When student loans go into default, you may lose installment plan privileges and the entire amount owed can become due immediately.
• Loss of federal loan protections: Defaulting on federal loans means you're ineligible for federal deferment and forbearance. You also won't qualify for benefits like flexible income-driven repayment plans or student loan forgiveness.
• Can't borrow future federal loans: A federal student loan default also makes you ineligible for additional federal student aid. This can be a major consequence if you plan on returning to school and relying on federal loans.
• Legal actions and collections: Loan holders can make efforts to sue you in court to collect the owed debt, or send the defaulted loan to a third-party debt collector.
• Wage garnishment and federal payouts withheld: If you default on a federal loan, any federal payouts, like tax refunds and Social Security benefits, can be withheld to pay down your debt. Your paycheck might also be directly garnished through your employer.
• Challenges with future financing opportunities: Having a student loan default on your record can make it harder to get approved for other consumer loans, like a mortgage or auto loan. If you are approved for a future loan, your interest rates might be high due to the default.

How to recover from student loan default

If you have defaulted federal student loans

The easiest and fastest way to get out of federal student loan default is by making a lump-sum payment for the full amount that's owed. But if you were already struggling to make payments on your loan, that might not be a possibility. Here are three ways to move forward if you've defaulted on federal loans:

Enroll in the Fresh Start program

This temporary program lets you immediately pause collections, access federal aid, and report your loan status as "current" with the credit bureaus. It also gives you another chance at loan rehabilitation if you've already rehabilitated a loan in the past or need to rehabilitate again in the future. Plus, the Department of Education will have the record of your default removed from your credit report. After enrollment, you can regain access to income-driven repayment plans, forgiveness programs, and temporary forbearance and deferment. Fresh Start currently runs through September 2024.

Apply for loan rehabilitation

Loan rehabilitation is a one-time option that removes a default record from your credit profile, and helps you regain access to federal benefits and future aid. Depending on your federal loan type, this process involves making nine consecutive monthly payments over a period of 10 months. The amount you pay is set by your loan holder. Note that the Fresh Start program has temporarily replaced rehabilitation. Once Fresh Start ends, borrowers can use loan rehabilitation again.

Consolidate your loans

A Direct Consolidation Loan pays off your defaulted loan and creates a new loan consolidation. To consolidate, you can make three consecutive monthly payments in full and on time. The amount of these payments will be determined by your loan holder. The other option is agreeing to pay back the Direct Consolidation Loan through an income-driven repayment plan. Note that when you consolidate, accrued interest is added to your principal loan balance, meaning you'll be charged interest on a higher amount.

If you have defaulted private student loans

Getting out of default for private student loans is a different process. There aren't standardized programs specifically designed to get you out of default, but there are a few options.

Dispute the debt

The first thing to do if a debt collection agency contacts you is to request a debt validation notice. Debt collectors are required to give you a notice with information about your debt, such as the creditor's name, amount owed, and the date of the last payment it received. If you don't believe the debt is yours, if it has already been paid in full, or is past its statute of limitations, send a written dispute to the collector within 30 days. Once sent, they can no longer make collection efforts until they verify the debt.

Consult a lawyer

If you're dealing with a complex student loan default situation, consider working with a debt attorney for guidance. They can help you understand your borrower rights and options for your specific situation.

Negotiate a debt settlement

Your lender or debt collector may be willing to accept a lump-sum settlement payment for a reduced amount. Just be wary of companies that charge fees for debt settlement services. As they negotiate with your creditor, these companies may advise you to stop making payments to the lender, and instead, have you save money separately for your lump-sum payment. During this period, your lender will report the default to credit bureaus, and you could incur additional late fees and interest if the lender refuses to settle. There's also no guarantee that the loan holder will agree to a reduced amount.

Avoid defaulting on student loans

If you know you'll have trouble making student loan payments and default is a possibility, take action as soon as you can. You might be able to arrange temporary low or paused payments, or another payment plan entirely, with your lender or servicer. For example, federal loan borrowers can request an income-driven repayment plan with a monthly payment as low as $0, if eligible. You may also be able to get a deferment or forbearance if you contact your loan servicer.

If you have private student loans, consider refinancing them if you can qualify for a better interest rate and terms. You may be able to lower your monthly payments and cut your overall student loan costs through a refinance loan. Just keep in mind that refinancing federal loans will cause you to lose access to federal benefits like loan forgiveness and income-driven repayment plans.