Student Loan Default and How to Avoid It
The consequences of defaulting on federal or private student loans can be severe. The U.S. Department of Education, in particular, possesses strong powers for collecting on defaulted federal student loans.
What Can Happen When Student Loans Go Into Default
|Characteristic||Federal Student Loans||Private Student Loans|
|Number of days of non-payment to go into default||360 days||Typically, 120 days, but different lenders may have a different time-frame depending on their loan contracts|
|Action required to garnish your wages||U.S. Department of Education can garnish without a court order||Lawsuit and court judgment required|
|How much disposable pay can be garnished?||Up to 15%||Up to 25%|
|Can collection charges be added?||Yes — Collection costs can be as high as 24%, but can be reduced to 18.5% if you consolidate out of default or as low as 16% if you rehabilitate the loan||Yes (not limited)|
|Default reported to credit agencies?||Yes||Yes|
|Can Social Security disability and retirement benefits be withheld?||Yes — up to 15%||No|
|Can tax refunds be intercepted/offset?||Yes||No|
|Bankruptcy discharge||Nearly impossible||Nearly impossible|
Tips for Avoiding Default
- Borrow only what you can afford to repay in a reasonable amount of time based on your future salary.
- Find out if you are eligible for a repayment plan that's a better fit for your current financial circumstances.
- Request a temporary suspension of payments with a deferment or forbearance.
- Look into programs for forgiveness or discharge of your federal student loans.
- Consolidate your loans to get a lower and more affordable payment.
Already in Default?
If you are currently in default on your federal or private student loans, the first thing you should do is contact your lender or loan servicer to find out how to get your loans out of default, which is sometimes referred to as rehabilitation. You can rehabilitate defaulted federal student loans either by making a number of consecutive, full, voluntary monthly payments or by consolidating your federal loans and agreeing to repay the consolidation loan under an income-based repayment plan.
Your primary goal should be getting a monthly payment you can afford right now. When your finances improve, you can speed up your payments to save money on interest.