Avoiding Student Loan Default
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||270 days||Typically, 120 days, but different lenders may have a different time-frame depending on their loan contracts|
|Action required to garnish your wages and/or federal/state tax refunds||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%||Private lenders can garnish the lesser of 25% of your disposable income or all income which exceeds 30 times the Federal minimum wage
|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 and retirement benefits be offset?||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. This is sometimes referred to as rehabilitation. Borrowers can rehabilitate defaulted federal student loans by making nine consecutive, full, voluntary and affordable on-time monthly payments within 20 days of the due date. The good thing about a rehabilitated loan is that once your loan is rehabilitated, any record of a default showing on your credit report will be removed, so this can result in a possible credit bump. However, any late payments that were reported before your loan went into default will stay on your report.
Another way for you to get the loan out of default is by going the consolidation route. To do this, you consolidate your federal student loan into a new Direct Consolidation loan. You can do this by simply agreeing to repay the consolidation loan under an income-based repayment plan, or you can first make three consecutive voluntary, on-time, full monthly payments on the defaulted loan before you consolidate it.
But what if you have already consolidated and your defaulted loan is a consolidation loan? In that case, going the consolidation route will depend on the type of loan you have. If you have a Direct Consolidation loan, you also have to include one other eligible loan to re-consolidate, in addition to meeting one of the two requirements above. If you do not have one other loan to re-consolidate, unfortunately, you’re out of luck. Your only options will be loan rehabilitation, or to repay the loan in full. If you have a defaulted Federal Family Education Loan (FFELP) Consolidation loan, you don’t have to have any new loans to re-consolidate and get your loans out of a default status.
You can re-consolidate by agreeing to repay the new consolidation loan using an income-driven repayment plan. The good news is that once your defaulted loan is consolidated, you become eligible for benefits such as deferment, forbearance, and loan forgiveness.
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.