Understanding Defaulted Student Loans: What They Are, the Consequences, and How to Fix Them


Student loans are a common way to finance education, but sometimes life circumstances make it difficult to keep up with payments. When this happens, a student loan can enter a state of default, which has significant and lasting consequences. Understanding what a student loan in default is, what happens, and what your options are is crucial for anyone struggling to manage their education debt.

What Is a Defaulted Student Loan?

A student loan is considered to be in default when a borrower fails to make payments for a specified period. The exact timeline for a loan to enter default depends on the type of loan:

  • Federal student loans: For most federal student loans, default occurs after 270 days (about nine months) of missed payments. This applies to popular loans like Direct Loans and FFEL Program loans.

  • Private student loans: The definition of default for private loans varies by lender. Some may consider a loan in default after just one missed payment, while others have a longer grace period. It is essential to check your loan agreement to understand the specific terms.

Default is different from forbearance or deferment, which are temporary periods where you can legally pause or reduce your loan payments without penalty. When a loan is in default, the entire outstanding balance becomes immediately due, and the government or lender can take action to collect the debt.

What Happens When You Default on Student Loans?

The consequences of a defaulted student loan are severe and can significantly impact your financial future.

  • Credit Score Damage: A defaulted student loan will be reported to the major credit bureaus, causing a dramatic drop in your credit score. This can make it difficult to get approved for new loans (like a mortgage or car loan), rent an apartment, or even secure certain jobs. The default can stay on your credit report for up to seven years.

  • Wage Garnishment: For federal student loans, the government can garnish (take) a portion of your wages directly from your paycheck without a court order.

  • Tax Refund Offset: The government can seize your federal or state tax refunds to pay off the defaulted debt.

  • Loss of Eligibility: You will lose eligibility for federal student aid programs, meaning you cannot receive a new student loan or grant to go back to college. You also lose access to flexible repayment plans and deferment or forbearance options.

  • Collections Activity: The loan will be sent to a collections agency, and you will be responsible for paying additional collections fees, which can be substantial.

  • Legal Action: While less common, the Department of Education can take you to court to force payment.

How to Fix Defaulted Student Loans

If you have a defaulted student loan, there are steps you can take to get your loans back in good standing. The specific options depend on the type of loan.

  • Loan Rehabilitation: This is a common path for federal loans. You make nine on-time, voluntary monthly payments over a period of ten consecutive months. The payment amount is based on your income. Once successfully completed, the default will be removed from your credit report, and you will regain eligibility for federal student aid.

  • Loan Consolidation: You can consolidate your defaulted federal loans into a new Direct Consolidation Loan. To be eligible, you must either agree to make three consecutive, on-time monthly payments on the defaulted loans or agree to repay the new consolidation loan under an income-driven repayment plan.

  • Repayment in Full: Paying off the entire loan balance, including any accrued interest and collections fees, will resolve the default.

The Department of Education has also recently launched initiatives like the "Fresh Start" program to provide an easier path for borrowers to get out of default. This program automatically removes the default status and associated negative credit reporting for eligible federal loans.

What to Do If You're Struggling

If you are worried about defaulting on your student loans, the best course of action is to be proactive. Contact your loan servicer immediately to discuss your options. They can help you with a variety of solutions, including:

  • Income-Driven Repayment (IDR) plans: These plans cap your monthly payments at a percentage of your discretionary income. For some, this can lower payments to as little as $0 per month.

  • Deferment or Forbearance: If you are experiencing a temporary financial hardship, these options allow you to pause payments temporarily.

Understanding what defaulted student loans are and the serious implications they carry is the first step toward avoiding them. If you are already in default, know that you have options and there is a path back to financial stability.

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