Student Loan Default: What It Means and How to Deal With It

If you don’t pay your student loans, creditors will start calling. If you still don’t pay, your loans will go into default.

A student loan default will be on your credit report for seven years, making it hard to borrow money for a car, home or another degree. It can even hurt your ability to rent an apartment or sign up for a new cell phone plan. And depending on the type of loans you have, creditors can take some of your wages, withhold your tax refund or take you to court to collect the debt you owe.

But fight the urge to crawl into bed, pull up the covers and hide from all the creditors. We’ve outlined a plan for how to get out of default, whether you have federal or private student loans.

(If you’ve missed payments but aren’t technically in default yet, avoid it by signing up for an income-driven repayment plan, asking for deferment or forbearance, or calling your private lender to request a lower payment.)

Federal student loan default

Federal student loans are considered “delinquent” the first time you miss a payment. A late payment will start affecting your credit score after it’s 90 days late, but the most serious consequences hit when your loan goes into default. For most federal student loans, that happens when you’re 270 days late on a payment. If you have Federal Family Education Loans, they go into default when you’re 330 days late.

If you have a federal loan in default, calls and letters from bill collectors will become rampant. The amount you owe will balloon because of late fees, collection costs and accruing interest. You’ll no longer be eligible for deferment, forbearance, federal repayment plans or additional federal student aid. The government may start taking money directly out of your paycheck, Social Security benefits or from your tax refund to collect on the debt you owe.

How to deal with it

Default is a nightmare, but the Department of Education offers three clear default escape routes: repayment, rehabilitation and consolidation. The best one for you depends on your priorities. Do you want to get out of default as soon as possible? Unless you can pay everything you owe upfront, consolidation is probably your best bet. Focused on salvaging your credit score? Try rehabilitation.

Here are the details you need to know about each option:

• Repayment: If you can swing it, pay off all the debt you owe to get out of default. That may sound counterintuitive — if you defaulted on your loan, how could you possibly come up with the money to pay it all off in one fell swoop? But if you come into an inheritance or have a family member who can help you out, this is the easiest way out of default. You also may be able to negotiate with the federal collections agency to chop around 10 percent off the total amount you owe, says Natalia Abrams, executive director of the nonprofit Student Debt Crisis.
• Rehabilitation: To get rehabilitation, you have to make nine monthly loan payments within 10 consecutive months, and be no more than 20 days late on any payment. In a rehabilitation plan, your monthly payment will be 15 percent of your discretionary income — if you can’t afford that, you can request a lower payment. Fill out this form documenting your income and submit it to your loan holder. After you make all nine qualifying payments, the default will be wiped from your credit report, but the late payments recorded on your report from before the loan was in default will remain. You can only rehabilitate a federal loan once.

• Consolidation: Consolidating your defaulted loan or loans into a Direct Consolidation Loan is another way out of default. But unlike with rehabilitation, consolidation doesn’t remove the default from your credit report — it will remain for seven years. This is an option for you even if you have only one loan. Once your loan is consolidated, you have to make payments on an income-driven repayment plan.

In all three cases, you still have to pay back the debt you owe. But after you repay, rehab or consolidate your debt, your loans will technically be in good standing. You’ll again be eligible for income-driven repayment plans, and deferment or forbearance. You’ll also be eligible for more federal student aid, although you should almost certainly avoid taking out more loans.

Private student loan default

Private student loans go into default one day after you miss a payment — there’s no delinquency period, as there is with federal student loans. Private lenders can technically sue you after you miss one payment, but lenders don’t typically jump to a lawsuit that quickly, says Josh Cohen, a lawyer specializing in student loans.

Unlike with federal loans, creditors can’t immediately garnish your wages, Social Security checks or tax returns to collect the debt you owe on private student loans. But if you don’t pay, the loan holder could earn the right to do those things if it files a lawsuit against you and wins. The loan holder could be your lender, a collections agency or the lender’s insurance company.

« More: 3 tips for paying private student loans

How to deal with it

If you’re proactive about communicating with your lender, many private lenders will help you catch up on payments by temporarily lowering your monthly payment or allowing you to go into deferment or forbearance. But if you continue to stay behind on your payments — especially without talking to your lender — expect calls from a debt collector. The Consumer Financial Protection Bureau has sample letters that you can use when responding to bill collectors. If collectors are harassing you for your federal or private loans, you can submit a complaint to the CFPB.

If you don’t catch up on your private loan payments, your loan holder will consider your loan “charged off,” or uncollectible, when you’re 120 to 180 days behind, depending on the lender. A charged-off loan will stay on your credit report for seven years, even if you pay it back before then.

“Once it’s charged off, you cannot save it,” Cohen says. “There is no rehabilitation with private loans.”

But you still owe the debt even after it’s charged off. Your loan holder can sue you to collect on the debt, but not all lenders do, Cohen says. If they don’t sue, you still owe the debt, but there’s no way for them to enforce their right to collect what you owe.

If you’re this deep into a private student loan default, it’s best to contact a lawyer who specializes in student loans. The private student loan market is especially complicated, so having someone who understands the system, your rights and your options is crucial.

Teddy Nykiel is a staff writer at NerdWallet, a personal finance website. Email: teddy@nerdwallet.com. Twitter: @teddynykiel.