Student Loan Default: How to Get Out and Protect Your Finances

Falling behind on student loans feels overwhelming. You can recover.

Federal loans enter default after 270 days of missed payments. Private loans may default in just 90 days. Defaulting triggers serious consequences, but you have options to fix it.

Millions of borrowers face this challenge. You can get your loans back on track through rehabilitation or consolidation.

When Do Student Loans Go Into Default?

Each loan servicer sets their own timeline for default.

Federal student loans enter default after 270 days of missed payments. That’s roughly nine months.

Private student loans may default after just 90 days. Some lenders wait longer.

Your loan servicer can tell you exactly when your loan will default. Contact them immediately if you’ve missed payments.

Delinquency vs. Default: Know the Difference

Delinquency and default are not the same thing.

Delinquency starts the day after you miss a payment. Your loan is late but not yet in default.

Default happens after months of continued nonpayment. The consequences become much more severe.

Over 3 million borrowers have defaulted on student loans. They owe more than $86 billion combined.

What Happens When You Default on Student Loans?

Default consequences depend on whether you have federal or private loans.

Federal student loans come from the government. Private student loans come from banks and other lenders.

When you default, lenders can take aggressive action:

• Accelerate your loan, making the full balance due immediately
• Garnish your wages directly from your paycheck
• Send your account to a collection agency
• Report the default to credit bureaus

Federal loan defaults create additional problems:

• Your academic transcripts may be withheld
• Your tax refunds can be seized
• Social Security benefits may be garnished
• You lose access to deferment and forbearance

Federal Student Loan Default Consequences

Federal loan default makes your entire balance due immediately. You lose access to helpful repayment benefits.

Here’s what you can expect:

• Repayment options disappear. You can’t use deferment or forbearance anymore. Income-driven repayment plans become unavailable.
• Federal student aid ends. You can’t receive financial aid until you fix the default. Returning to school becomes much harder.
• Your credit score drops. The default appears on your credit report. Future borrowing becomes difficult and expensive.
• Wage garnishment begins. The government takes up to 15% of your paycheck without a court order. You’ll receive 30 days notice before garnishment starts.
• Tax refunds get seized. Your federal tax refund goes directly to your loan balance. Social Security benefits can also be taken.
• Transcripts get held. Your school may refuse to release your academic transcript. You can’t transfer credits or apply to other programs.
• Collection agencies get involved. Private collection companies work for the Department of Education. You’ll owe collection fees on top of your loan balance.

Some federal student loans can be discharged in bankruptcy. Speak with a bankruptcy attorney for free to explore your options.

Financial Aid After Default

You can’t receive federal financial aid while your loans remain in default.

Getting your loans out of default restores financial aid eligibility. You need to complete rehabilitation or consolidation first.

Tax Refund Garnishment Explained

The government can seize your tax refund to repay defaulted federal loans. Private lenders can’t do this.

The Treasury Offset Program handles tax refund seizures. Your Social Security number gets matched to your tax refund. The money goes straight to your loan servicer.

You’ll receive two notices before garnishment:

1. Your loan servicer warns you about the default and possible collections
2. The Treasury Offset Program notifies you at least 60 days before taking your refund

You can stop or avoid garnishment by:

• Rehabilitating your loan. Make five on-time payments and garnishment must pause.
• Disputing the debt. Challenge errors or prove you already paid.
• Requesting a hardship refund. Show that garnishment causes extreme financial difficulty.
• Filing an injured spouse claim. Protect your spouse’s portion of a joint tax refund.

Call the Treasury Offset Program at 1-800-304-3107 for help. Their website explains how to dispute an offset.

Stopping Wage Garnishment

The Department of Education must notify you 30 days before garnishing wages. You can request a hearing to challenge the garnishment.

Prepare a simple list of your monthly finances:

• All income sources
• Housing and utility costs
• Medical expenses
• Childcare costs
• Court-ordered payments like child support

Bring documentation to support your case. Pay stubs, rent receipts, and utility bills help prove hardship.

The government may reduce garnishment amounts if you prove financial hardship. They might stop it entirely.

You can also challenge garnishment if:

• The debt amount is incorrect
• You already paid off the loan
• You’re not the actual borrower

Act quickly. Garnishment typically won’t start until after your hearing concludes.

Private Student Loan Default Consequences

Private loan defaults create similar problems as federal defaults. Key differences exist.

Private lenders can’t seize tax refunds or federal benefits. They must sue you in court to garnish wages.

Your loan becomes due immediately when you default. The default damages your credit score and appears on your credit report.

Private lenders turn unpaid loans over to collection agencies. The timeline varies by servicer.

Collection agencies often file lawsuits against borrowers. They must win a court judgment before garnishing wages or seizing bank accounts.

You’ll receive a court summons if sued over a private student loan. You can fight the lawsuit or negotiate a settlement.

Getting Out of Student Loan Default

You can escape default through rehabilitation or consolidation. Both options work.

Rehabilitation offers better benefits but takes longer to complete. Consolidation works faster but with some trade-offs.

Student Loan Rehabilitation

Rehabilitation removes the default status from your record. You get one chance to rehabilitate each loan.

Successfully rehabilitating your loan restores important benefits:

• Deferment and forbearance eligibility returns
• Income-driven repayment plans become available again
• Loan forgiveness programs open up
• Federal student aid eligibility resumes

Contact your loan servicer to start rehabilitation. Tell them you want to set up a rehabilitation plan.

Your servicer will ask for income documentation. Your monthly payment depends on what you earn.

You must make nine consecutive on-time payments. The payments must be voluntary and reasonable based on your income.

After five successful payments, wage garnishment and tax offsets must stop. Complete all nine payments to remove the default from your credit report.

Student Loan Consolidation

Consolidation combines multiple loans into one new Direct Consolidation Loan. The new loan pays off your defaulted loans.

Consolidation restores most benefits:

• Deferment eligibility returns
• Forbearance becomes available
• Repayment plan options expand
• Loan forgiveness programs reopen
• Federal aid eligibility resumes

To consolidate a defaulted federal loan, you must either:

• Agree to an income-driven repayment plan, or
• Make three consecutive voluntary on-time payments on the defaulted loan first

Consolidation works faster than rehabilitation. You can complete it in weeks instead of months.

The default stays on your credit report after consolidation. Previous late payments remain visible. Only rehabilitation removes the default from your credit history.

Choosing Between Rehabilitation and Consolidation

Rehabilitation takes longer but offers better credit repair. Consolidation works faster but leaves marks on your credit.

Choose rehabilitation if you:

• Want the default removed from your credit report
• Can afford to wait nine months
• Haven’t used rehabilitation before on this loan

Choose consolidation if you:

• Need to stop garnishment immediately
• Already used your one rehabilitation opportunity
• Want faster access to income-driven repayment plans

If you’re facing overwhelming student debt, our partner Cambridge Credit Counseling can help you explore repayment options and create an affordable payment plan.

Taking Action on Defaulted Student Loans

Default creates serious problems, but solutions exist. Rehabilitation and consolidation both work to restore your benefits.

Contact your loan servicer today if you’ve defaulted or fallen behind. The sooner you act, the more options you have.

Don’t ignore default notices or garnishment warnings. You have rights and protections available.

Millions of borrowers have successfully escaped default. You can too.