Borrowers who miss student loan payments could face the penalties of a student loan default. For most federal student loans, it takes 270 days of nonpayment for a loan to enter default.
Consequences of Default
- The entire loan balance becomes due immediately
- Borrower no longer qualifies for deferment, forbearance, or federal repayment plans
- Borrower loses eligibility for additional federal student aid
- Loan may be sent to a collection agency
- Negative credit reporting
- Taxes may be withheld through a tax offset
- Wages may be garnished
- Loan balance will increase as a result of late fees, collection costs, and added interest
- Lender may take legal action to collect the debt
- Federal employees face a federal salary offset
Borrowers who default on their federal student loans should stay in contact with their loan holder. It is best to resolve the default as soon as possible in order to return the loan to good standing.
Getting out of Default
Borrowers with defaulted student loans have a number of options to remove the loans from default. These options include:
Loan Repayment: Borrowers have the option to pay a defaulted loan in full. Not all borrowers can afford to do this, however. Those borrowers can explore rehabilitation and consolidation as routes out of default.
Loan Rehabilitation: A rehabilitation program is a way for borrowers to get federal loans out of default. To rehabilitate a defaulted student loan, borrowers must agree to a reasonable and affordable payment plan with their loan holder. This payment plan will require nine consecutive payments to the loan holder. Once the program is completed, the loan will be removed from default and the default notation will be removed from the borrower’s credit report. The borrower will also regain eligibility for repayment options that were lost due to the default.
Loan Consolidation: Borrowers in default can take advantage of loan consolidation as a way out of default. With loan consolidation, the defaulted loan(s) are paid in full when a new Direct Consolidation Loan is made. To qualify for a Direct Consolidation Loan, the borrower must first typically make three voluntary, consecutive, on-time payments to their loan holder. Otherwise, borrowers must agree to enroll the Direct Consolidation Loan on one of the income-driven repayment plans.
When getting a loan out of default, borrowers may be charged collection fees of up to 18.5 percent.