What to Do About Defaulted Student Loans

FT Contributor  | 

You’ve entered into a student loan default if you haven’t made the payments you agreed to make in the loan contract. When you become delinquent on your loan by missing a few payments, it can be hard to catch up. Before you know it, you could be facing serious default penalties, like garnished wages, a damaged credit score, or suspension of your professional license.

Once your student loans have defaulted, it can feel impossible to get out of debt and stop these penalties from occurring. However, the sooner you take action to get your student loans out of default, the less harm these penalties can cause to your financial future. Instead of ignoring your defaulted student loans, if you make a plan to rehabilitate, consolidate, or pay off your loans now, you can get out of default and stay on the path to reaching your financial goals.

What Is Student Loan Default?

When you begin to miss payments for your student loans, you become delinquent. After you miss a certain number of payments, the loan servicer updates the status of your loans to “defaulted.” The servicer can then take negative action against you, such as sending your account to collections or taking you to court to garnish your wages. The number of payments you can miss before you default on your student loans depends on the type of loans you have.

Federal student loans are loans provided by the federal government. In most cases, your federal student loan is in default if you’ve missed payments for nine months, or 270 days. However, if you have a Federal Perkins Loan, you can default immediately if you miss a scheduled payment.

You have a private student loan if you agreed to loan terms with a private loan provider, such as a financial institution. The default timelines for private student loans may vary by loan servicer. Some servicers consider your student loan in default if you missed one payment while others may not consider your loan in default until you’ve missed three payments total.

How to Check if Your Student Loans Are in Default

It’s important to know how to check if your student loans are in default so you can ensure you’re in good standing with your loan servicer. You have three different ways to investigate whether your student loans are in default.

  1. Check with your servicer.

If you know you’ve missed a few student loan payments, it can be intimidating to call your loan servicer and ask how much you owe. However, this is usually the best way to obtain accurate information about your loan. The servicer has real-time information about your loan so you can find out its most recent status.

  1. Log in to StudentAid.gov.

If you have a federal student loan, you can create an online account with StudentAid.gov using your FSA ID. Sign into your account to look up information on your student loans, including the balance and how far behind you are with your payments. You should also be able to obtain loan servicer information and the status of your loans through your online account.

  1. Pull your credit report.

You’re eligible to order one free credit report per year through a credit bureau. Defaulted student loans will be listed in the negative information section of your report. However, your credit report may not have the most updated information. Even if you don’t see defaulted student loans on your report, you should still check with your servicer to ensure this information is up-to-date.

Getting Student Loan Default Help

If you know your student loan has defaulted and you’re feeling helpless, reach out to the loan holder or servicer. The loan holder is your best source for updated information on your loan. The servicer wants you to be able to pay off the balance of the loan and may offer to help you create a loan rehabilitation agreement.

Your loan provider may ask for information on your income and expenses to better understand your financial situation. The company may offer you a new plan that makes your monthly payments more affordable so you can get back on track.

Three Ways to Get Out of Default

Once you’ve defaulted on your student loans, there are three ways to get out of default. Each student loan default resolution has its own benefits, time restrictions, and specific agreements you must adhere to in order to get out of default status.

Loan Rehabilitation

To start the loan rehabilitation process, you must contact your loan servicer. Agreeing to a loan rehabilitation program is beneficial to your credit. While the payments you missed on your student loans will still show up on your credit report, the student loan default itself can be removed from your report once you’ve completed the program.

To complete the student loan rehabilitation program successfully, you must make nine consecutive loan payments over 10 months that are 15% of your discretionary income, or less if you request a lower amount. Once you’ve satisfied the rehabilitation agreement, your loan is no longer in default status.

You can only use the student loan rehabilitation once over the life of your loan. Therefore, it’s important to ensure you can afford the payments you agree to since you only have one chance for rehabilitation.

Loan Consolidation

Loan consolidation is a faster process than student loan rehabilitation. However, your default is not removed from your credit report, even if you enter into a consolidation agreement. With loan consolidation for your federal student loans, you can group your loans together into one loan with new terms, called a Direct Consolidation Loan.

To qualify for loan consolidation, you must either make three consecutive on-time, monthly payments in full, or agree to repay the Direct Consolidation Loan under an income-driven repayment plan. To consolidate under an income-driven repayment plan, you’ll need to provide documentation of your income when you call your loan servicer.

If your loan servicer is currently collecting payment for a defaulted loan through the garnishment of your wages, you cannot enter into a loan consolidation agreement. The wage garnishment judgment must first be lifted before you have the option to consolidate the loan.

Repayment in Full

Your loan servicer will accept repayment in full, even if your student loans are currently in default. If you can afford to provide the full loan payment to the servicer, you’ll be taken out of default, which will also be reflected on your credit report.

Repaying your student loans in full may not seem like a feasible option, especially if your loan balance is high. However, this could be an option to get out of student loan default if you have a family member willing to lend you the lump sum at a low-interest rate. Repayment in full may also be viable if you recently received an inheritance or had an investment pay off. While repaying your loan in full is the fastest way to get out of student loan default, your financial stability should remain your top priority.


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This post was updated November 6, 2019. It was originally published November 6, 2019.