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Q: What is student loan default?

May 16, 2020

Student loan default is what happens when you fail to repay your student loan debt. For federal student loans, you default when you after 270 days of missed payments. For private student loans, you typically default/become delinquent when you miss a single payment.

Coronavirus/COVID 19

The US Department of Education suspended collection activities on defaulted federal loans it owns. Please note two things. First, the Department of Education doesn’t own all federal student loans. Some federal loans are owned by guaranty agencies like ECMC, MOHELA, Trellis, etc. To find out who owns your federal loans, call the National Student Loan Data System at 1-800-999-8219 or the Student Loan Support Center at 1-800-557-7394. Second, the suspension is temporary. It will last until the end of September 2020.

When is a student loan delinquent?

Federal student loans have a 15-day grace period to make your monthly payments. So if your payment is due on the 10th, you have until the 25th to send payment to your loan servicer. If you’re a day late, you’re delinquent. Private student loans typically don’t have a grace period. Because of that, you usually have to pay the servicer on the date listed in the promissory note. If not, your loan is delinquent.

What happens if your student loan is delinquent?

When a federal student loan is less than 90 days delinquent, your student loan servicer sends you notices to make a payment, request a deferment or forbearance, or change your repayment plan. After your account is 90+ days delinquent, your servicer notifies the credit reporting bureaus that your student loan debt is delinquent.

This notification will likely hurt your credit score but it will not trigger a wage garnishment or tax refund offset. Those harmful actions don’t start until you’ve defaulted on a federal loan.

With private student loans, it’s my experience that a loan servicer will start reporting your delinquency to the credit reporting bureaus after you’re 30 days past due. Usually, they’ll keep reporting your account delinquent until you bring your loan payments current. Your options for doing that may include:

  • deferment;
  • forbearance; and
  • request interest-only monthly payments

You don’t have to worry about wage garnishment or tax refund offset for defaulted private student loans. Your lender can’t forcefully collect from you until they sue you and get a judgment from a court.

How can I get out of a delinquent student loan?

In most cases, there’s no way out of a delinquent student loan. You’re stuck having to pay back the past due loan balance.

Having said that, if you think you’ve made all your required student loan payments, ask your loan servicer to double-check their records. Your servicer should be able to give you a documented reason why they believe your account is delinquent.

Click here to learn How to Get Federal Student Loans Out of Default.

What are the consequences of defaulted student loans?

Once you default on federal student loans you lose eligibility for:

  • income-driven repayment plan options;
  • deferment and forbearance;
  • loan forgiveness; and
  • new financial aid/student aid.

On top of that, your credit score will take a hit as both the 9 months of late payments and a defaulted status will be added to your credit report.

And if that weren’t bad enough, your defaulted debt will be sent to a debt collector who, after a period of time, is authorized to send a garnishment order to your job and to mark your tax refund for offset.

Private student loans

There are far fewer consequences to defaulting on your private loan debt.

Until a loan holder sues a borrower, the loan holder is limited to reporting negatively to the credit bureaus and contacting you with debt collection attempts (phone calls, letters, etc.).

Without a court order,  a private loan holder can’t take money out of your bank account, sell your house, or garnish your wages.

How to bring a defaulted loan current

You have 3 options to bring defaulted federal student loans back into good standing:

  1. negotiate a settlement;
  2. enter into a loan rehabilitation agreement; or
  3. apply for a Direct Consolidation loan.

Let’s talk about each option real quick.

Settlement

While a settlement sounds great – pay less to be done with your loan balance forever – the reality is that federal student loan settlements are expensive. Typically, the best settlement you can negotiate is for 85% of the loan balance less any collection fees. Plus, you have to pay that amount within 30 to 90 days.

For those 2 reasons, I’ve found that few borrowers can afford to settle their federal student loans.

Loan Rehabilitation

The loan rehabilitation program lets you get out of default by agreeing to make 9 monthly payments.

A couple of things to note about this program.

First, your monthly payments are calculated first using your adjusted gross income from your latest tax return and the number of dependents claimed on that return. If you can’t afford that payment, your payment will be calculated based on your current income and expenses. My clients usually pay less than $100 per month.

Second, the rehab program is a one-time opportunity. Because of that, you cannot rehabilitate a student loan twice.

Click here to read the Complete Guide to the Student Loan Rehabilitation Program.

Consolidation Loan

A consolidation loan takes your defaulted loan and combines it with other federal student loan debt to create a new Direct Consolidation Loan.

The new loan is immediately eligible for loan forgiveness programs and income-driven repayment plans. It also reinstates your eligibility to borrow new federal student aid.

The consolidation loan process typically takes about 2 to 3 months to complete.

So if you need to get out of default quickly (to go back to school for example) consolidation may be a better choice than the loan rehabilitation program.

Click here to learn Should I Consolidate or Rehabilitate My Student Loans?

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