Defaulted Student Loan: What Happens When You Stop Paying?
Missing student loan payments can snowball into a serious problem. Understanding what happens when a student loan goes into default is crucial for navigating repayment and protecting your financial future.
What is a Defaulted Student Loan?
A defaulted student loan occurs when a borrower fails to make their scheduled loan payments for an extended period, typically 270 days for federal student loans. This failure to pay triggers serious consequences for the borrower.
Can My Student Loan Go into Default?
Yes, your student loan can go into default if you stop making payments. This can happen for various reasons, including job loss, unexpected medical expenses, or simply feeling overwhelmed by the amount owed. Federal student loans have specific grace periods and delinquency timelines before they are officially considered in default.
How Does a Student Loan Go into Default?
The journey to default usually begins with missed payments. Here’s a typical timeline for federal student loans:
- First Missed Payment: Your loan servicer will likely send you a reminder.
- 90 Days Delinquent: If you miss three consecutive payments, your loan is considered delinquent. Your loan servicer will step up efforts to contact you, and the delinquency will be reported to credit bureaus, impacting your credit score.
- 270 Days Delinquent: For most federal student loans, this is the point where your loan is officially in default.
The consequences of default are significant and can include:
- Loss of Eligibility for Federal Aid: You won’t be able to receive federal student aid for future education.
- Credit Damage: Defaulting severely damages your credit score, making it harder to get loans, credit cards, rent an apartment, or even get a job.
- Collection Efforts: The loan holder or a collection agency will aggressively pursue repayment.
- Withholding of Tax Refunds: The government can seize your federal and state tax refunds to pay off the defaulted loan (Treasury Offset Program).
- Wage Garnishment: Your employer can be legally required to withhold a portion of your wages to pay the debt.
- Ineligibility for Deferment and Forbearance: You lose the option to pause payments through these programs.
- Accelerated Repayment: The entire loan balance, plus interest and fees, may become immediately due.
Real-World Examples of Student Loan Default
Imagine Sarah, who graduated with significant student loan debt. After losing her job, she struggled to make payments. She missed a few payments, then a few more. After nine months of not paying, her federal loans went into default. Suddenly, her tax refund was intercepted, and she received a notice that her wages could be garnished. The stress of the default impacted her ability to secure a new apartment.
Who is Affected by Student Loan Default?
Anyone with a student loan who cannot or does not make payments can end up in default. This includes borrowers with federal student loans (Direct Loans, FFEL Program Loans) and private student loans. However, the specific consequences and grace periods can vary between federal and private loans. Federal loans generally offer more options for avoiding or resolving default.
How to Avoid or Resolve Default
The best approach is to avoid default altogether. If you’re struggling to make payments:
- Contact Your Loan Servicer Immediately: Don’t wait. Explain your situation and explore options like deferment, forbearance, or income-driven repayment plans.
- Explore Income-Driven Repayment (IDR) Plans: These plans can lower your monthly payments based on your income and family size. Many federal loans are eligible.
- Consider Deferment or Forbearance: These allow you to temporarily pause payments, though interest may still accrue on unsubsidized loans.
- Rehabilitate Your Loan: For federal loans, loan rehabilitation is a process to get out of default. It typically involves making a series of on-time monthly payments (often on an income-based calculation). Once rehabilitated, the loan is no longer in default, and negative credit reporting is removed.
- Consolidate Your Loans: Federal loan consolidation can combine multiple federal loans into one new loan with a single monthly payment. This might offer a lower payment and can sometimes help with default, but it may extend the repayment period and could result in losing benefits from certain original loans.
Common Misconceptions About Defaulted Student Loans
- “The debt will eventually go away.” Defaulted federal student loans generally do not disappear. The government has strong collection powers.
- “I can just ignore it.” Ignoring the problem will only make it worse, leading to more severe collection actions and long-term credit damage.
- “Defaulting on private loans has the same consequences as federal loans.” While both have serious consequences, the specific rights and options for borrowers differ. Federal loans often have more consumer protections and repayment options.
Taking proactive steps and understanding your options are key to managing student loan debt and avoiding the severe repercussions of default.
Sources:
Federal Student Loan Default
What Happens When You Default on a Federal Student Loan?
Student Loans: Default, Repayment, and How to Avoid It