Defaulting on your student loans means you failed to make payments on your loans according to the terms of your Master Promissory Note that you signed at the time you borrowed your loan. Your loan is considered delinquent the first day after you miss a payment. Typically after 90 days of delinquency, most lenders or loan servicers will report to the three major credit bureaus and this will end up on your credit report and could negatively impact your credit score. As discussed in our Credit section, a negative credit report or score can lead to trouble in signing up for utilities, getting insurace, renting a residence or obtaining car or mortgage loans.
Review our steps for successful loan repayment to avoid default and remember to keep in touch with your lender or servicer if at any time it becomes difficult to make a payment. Learn more about default from the Department of Education.
Consequences of defaulting on your student loan are severe. They include:
- The entire balance of your loan (including interest) is immediately due and payable
- Loss of eligiblity for deferement, forbearance, and repayment plans
- Loss of eligiblity for federal student aid
- Assigment of your loan to a collection agency
- You are charged additional collection charges and costs associated with collection activity on your loan which can substantially increase you loan balance
- Default is reported to the three major credit reporting agencies and can negative impact your credit report and score
- Your federal and state (if applicable) taxes may be withheld through a tax offset, meaning the RIS can take your tax refund to collect any of your defaulted student loan debt
- Your employer (at the request of the federal government) can withhold money from your pay and send the money to the government (wage garnishment)
- The loan holder can take legal action against you and you may not be able to purchase or sell assets such as real estate
- Federal employees in default face the possiblity of having 15% of their disposable pay offset by their employer toward the repayment of thier loan
- It will take years to reestablish your credit and recover from default
- You may be unable to renew your professional license as long as you have an unresolved defaulted loan
If you are in default, your first step is to contact the agency that is billing you. You will want to explain the situation in detail and ask what options are available to get out of default. See if they can work with you. It's vital to maintain a realationship with you lender, loan servicer or collection agency. There are a few options to get out of default:
Repaying the balance of your defaulted loan in full will get you out of default. There are nuances of who to contact depending on if your loan is a federal Direct loan or a FFELP loan. If you have defaulted on a Perkins Loan, you must contact the school where you received the Perkins.
To rehabilitate your loan, you and the Department of Education must agree on a reasonable and affordable payment plan (contact your school for Perkins Loan). Once you have voluntarily made the agreed-upon payments on time and a lender has purchased your defaulted loan, your loan will be rehabilitated. Keep in mind any outstanding collection costs accrued will be added to your principal. Payments collected through wage garnishment or legal action do not count toward the loan rehabilitation payments. Benefits to rehabilitating your loan include the removal of default status (and the reporting to the national credit bureaus as defaulted), removal of wage garnishment and the removal of the withholding of your income tax refund made by the IRS.
You can also get out of default through loan consolidation. This allows you to pay off the outstanding combined balances for federal student loans to create a single loan with a fixed interest rate. A defaulted loan may be included in consolidation if you have made arrangements with the Department of Education and made several voluntary payments.