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How to recover if you defaulted on your student loans

January 6, 2023, 7:42 PM UTC
Photo illustration of a woman looking over financial data and looking concerned.
Refinancing, rehabilitiation, and settlement are some options for defaulted student loans.
Photo illustration by Fortune; Original photo by Getty Images

Unexpected financial hardship or job loss can have a variety of ramifications, particularly when it comes to your debt obligations and student loan repayment.

Americans are carrying $1.745 trillion worth of student loan debt as of the end of 2022, according to the Education Data Initiative. And about 16% of borrowers are in default, according to a White House press release issued in August. 

While coronavirus relief measures offered a pause on federal student loans going into default, that reprieve is scheduled to last only through this summer. And it doesn’t provide any protections for those with private student loans. 

When student loans enter default, it can impact your credit, trigger collection efforts, or even result in wage garnishment. When facing such circumstances, it’s important to have a recovery plan.

What does student loan default mean? 

Going into default means you have fallen behind on monthly loan payments. But there are different thresholds for assigning a default status to a student loan depending on the type of loan you have. 

The Federal Student Aid website explains that federal loans become past due or delinquent immediately after you miss a single payment. The delinquent status remains in place until you catch up on all overdue payments. If a loan remains delinquent for 90 days or more, the servicing organization is likely to report it to the credit bureaus, according to the Federal Student Aid website. Continuing to remain delinquent from this point forward may trigger a default status.

For private student loans, you may not have quite as much leeway before the servicer takes action. A missed payment may be reported to credit bureaus in as little as 30 days. And default may follow after that.

​​”For federal student loans, you are considered in default once your payment is 270 days past due, which is about nine months,” explains Leslie Tayne, debt relief attorney and founder of Tayne Law Group. “For private student loans, the timeline varies. However, it’s common for private student loans to go into default after 120 days.” 

Federal student loan default  

The immediate and long-term consequences of student loan debt vary based on the type of loans you have. For those with federal student loans, the result may include loan acceleration, disqualification from federal student loan programs such as forbearance and forgiveness, damage to your credit score, and being sent to collections.

“First, your loan balance becomes immediately due in full. This is known as acceleration,” says Tayne. “You also lose eligibility for many government protections and benefits, including forbearance, deferment, income-driven repayment plans, forgiveness programs, and federal student aid.” 

You may also have your wages garnished or tax return withheld. Further, student loan default can significantly harm your credit. A single missed payment can cause your score to fall significantly and will remain on your credit profile for seven years. Default causes your credit score to drop even more. 

It’s also worth noting that if a borrower has federal student loans in default, they are unable to take out additional federal loans until the initial loans are brought current and in good standing.

Private student loan default 

Similar to defaulting on federal student loan debt, there are a variety of consequences when you fail to keep up with private student loan repayment.

“It has the same negative impact on your overall financial health but happens faster with little recourse,” says Zack Geist, founder of Student Loan Tutor, a financial advisory company that provides custom student loan repayment strategies. “Delinquency after 30 days on private debt will show a late payment on credit reports, and defaulting will make the process of getting current even more arduous.”

The initial ramifications—for simply being delinquent—may include late fees and accrued interest being added to the loan balance. You will likely also be required to pay the delinquent amount due before the loans are posted as current on your credit report, which can have a significant impact on your score.

Once in default, private loans can result in wage garnishment, and potential civil lawsuits can add to the overall balance of the loan. 

“One of the biggest dangers of defaulting on a private student loan is that the lender might sue you in court over the amount owed, which is much rarer for federal loans,” says Tayne. “In addition to being ordered to repay the full loan balance, you may also be responsible for paying attorney fees and other court costs.”

All of the above actions can hinder you from taking out another loan in the future, whether it is a  mortgage, car loan, or personal loan.

Recovering from default 

If your student loans have fallen into default, don’t despair. There are several ways to recover from this situation. The options vary slightly depending on whether you have federal or private loans.

Federal student loans

There are multiple options to bring defaulted federal student loans current and in good standing. The first option is to pay your loan back in full in order to clear the default status. This, of course, is often not feasible for many borrowers. The additional options include:

Loan rehabilitation: Rehabilitation programs typically involve a written agreement to make nine consecutive monthly payments on the loan within 20 days of the due day. “These payments must be voluntary, reasonable, and affordable, as determined by your servicer,” says Tayne.

During rehabilitation, collections through wage garnishment or IRS withholding will stop. You’ll also become eligible for government programs like repayment plans and forgiveness once the loan is rehabilitated. And although your credit reports will show a history of missed payments leading up to default, the actual default will be removed. 

Loan consolidation: Yet another option is to apply for a consolidation loan to repay your outstanding balance. This can be a quicker approach to resolving a default but doesn’t offer as many benefits as rehabilitation.

“Your defaulted federal loan needs to be consolidated into a direct consolidation loan,” says Tayne “To do this, you must either agree to repay the new loan under an income-driven repayment plan or make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan before consolidating.”

You also have the option to refinance defaulted federal student loans with private lenders. But this may not be easy. “Without a cosigner, this is a complicated feat due to [lack of] creditworthiness,” says Geist. “And this is not the best option.” 

When transitioning from a federal student loan to a private loan, you lose access to all benefits associated with federal loans, such as forbearance and income-driven repayment.

Debt settlement: Seeking debt settlement of federal student loans, which involves trying to negotiate a payoff amount with a debt collector, is typically not a successful approach.

“Settlement on federal student loans compared to traditional defaulted debt does not come with much negotiating power,” explains Geist. “Typically, the debt collector will require the loans be settled for 100% of what you owe, versus negotiating with a debt collector for pennies on the dollar for other types of debt.”

Private student loans

When it comes to private student loans, the process of getting out of default depends largely on the loan servicer. The first step should always be to contact the lender or servicer about your situation and find out what rehabilitation it may offer.

“There are far fewer protections with private loans in general, and when it comes to default, sometimes the only way out is to pay the balance in full,” says Tayne. “However, it’s worth reaching out to your servicer and asking what options are available. They may be able to restructure your loan or work out another solution.”

Some options may include:

Refinancing the loan: You can try to repay a private student loan that’s in default by refinancing the balance into a new loan, though this may be difficult if your credit profile has already been impacted. You may need a cosigner to help with this approach.

Debt settlement:
If your student loan debt has been sent to a collection, you can contact the agency and try to negotiate a settlement. You’ll want to ask the agency how much you can pay it to settle the debt immediately, or try to structure a repayment plan with the debt collector to bring you current on the loan.

Seek assistance from a student loan lawyer: Yet another option is to seek out a debt resolution attorney who specializes in student loans. This individual can help you by drafting cease-and-desist requests for collection actions. 

Frequently asked questions

Can I get defaulted student loans forgiven?

No. Defaulted loans are not eligible for forgiveness plans because they are not in active repayment. However, you may be able to qualify in the future if you rehabilitate or consolidate your loan. 

Do student loans go away after 7 years?

No. Federal student loan debt is not able to be discharged in bankruptcy in the same way some other debts can be. Student loan debt stays with the borrower for life or until repaid. However, if the loans are refinanced as private loans and defaulted, then they can be eligible for discharge in bankruptcy. Typically, defaulted traditional debt will fall off your credit report after seven years if no action is taken on the debt or the debt collector does not inquire about the delinquent debt.

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