Student Loan Default Consequences: Federal & Private

Paying back student loans each month can be challenging, especially when you’re juggling other bills and expenses. Unfortunately, missing payments on your loans can cause them to fall into delinquency or default, which can have negative consequences for your finances. Not only will missing payments damage your credit, but defaulting on student loans can potentially lead to garnishment of your wages and tax refund. 

Here’s a closer look at what happens when you miss payments on both federal and private student loans, as well as your options for getting loans out of default.

Federal student loan default consequences 

Defaulting on a federal student loan can have a host of severe consequences:

• Loan acceleration: When your loan goes into default, the entire balance, plus interest charges, can become due right away. 
• Loss of access to federal benefits: You won’t be able to take advantage of federal programs such as deferment, forbearance, and income-driven repayment plans. 
• No more federal student aid: You won’t be eligible for additional federal financial aid, which could make it difficult to go back to school. 
• Damage to your credit score: Your loan servicer will report your late payments to the credit bureaus, which can damage your score. Late payments can stay on a credit report for seven years, making it difficult to access other financial products, such as a mortgage or credit card. 
• Wage garnishment: The government has wide-reaching powers of collection and can garnish your wages, tax refunds, and other federal payments (such as Social Security benefits) to recoup repayment for your student loans. 
• Collection fees: You may be charged debt collection fees if your student debt gets sold to a collection agency. 
• Can get taken to court: Your loan holder can sue you for the amount you owe, which could not only be a stressful experience, but could also lead to court costs and attorney fees. 

Private student loan default consequences 

Private lenders don’t have the same collection powers as the U.S. government. They can’t garnish your wages without a court order if you default on your private student loans. 

However, they can report the default to the credit bureaus, resulting in serious damage to your credit score. Plus, they can sue you over the debt, which will cost you in legal fees. 

Unlike federal student loans, private student loans have a statute of limitations (the time frame during which debt collectors can sue you). Once that statute of limitations has passed, a private lender can no longer take you to court over the debt. While you can no longer be sued at this point, lenders can still try to collect the debt and your credit can still be significantly impacted.

The amount of time varies by state, but it often spans anywhere from three to six years. Note that certain actions, such as making a partial payment on your old debt, can restart the clock on your statute of limitations.

When do student loans go into default? 

Federal student loans are typically considered delinquent one day after you miss a payment. After 90 days, your loan servicer will report your missed payments to the major credit bureaus (Equifax, Experian, and TransUnion). After 270 days of missed payments, your federal loans go into default. 

Through September 2024, however, struggling borrowers have a temporary “on-ramp” period to get back into the swing of repayment. During this on-ramp, missed payments on your federal loans won’t be reported as delinquent or in default.

After that date, though, the rules around student loans will likely return to normal. Plus, interest started accruing on federal student loans again in September 2023, so it’s a good idea to get back onto a repayment plan that works for you. 

Private student loans usually go into default after 90 days of missed payments. Depending on the lender, your payment may be reported as late to the credit bureaus 30 days after its due date. 

Avoid default with Fresh Start

Through September 2024, borrowers have an easy way to get their student loans out of default with the temporary Fresh Start program. To sign up for Fresh Start, log in to your account at MyEDDebt.ed.gov, call 1-800-621-3115, or reach out via mail to Default Resolution Group, P.O. Box 5609, Greenville, TX 75403-5609.

The online process takes less than 10 minutes and will restore your defaulted student loans to good standing. The Fresh Start program also has a number of other benefits. It will:

• Remove the record of default from your credit report.
• Restore your access to federal student aid, such as grants and loans.
• Stop collection efforts, such as tax refund and wage garnishment and collection calls.
• Make you eligible for other government loans, like government-backed mortgages.
• Give you the option to rehabilitate your loans in the future. In other words, using Fresh Start won’t count toward your one-time loan rehabilitation option.
• Get you on a new repayment plan. Around 80% of borrowers who use Fresh Start get their loans on an income-driven repayment plan.
• Restore your access to loan forgiveness programs, as well as deferment and forbearance.

Direct Loans, Federal Family Education Loan (FFEL) program loans, and Perkins Loans held by the Department of Education that defaulted prior to the COVID-19 student loan payment pause are all eligible for the Fresh Start program. 

However, some other loan types are not eligible, such as defaulted Perkins Loans held by schools, as well as Direct Loans and FFEL program loans that defaulted after the end of the payment pause.

My loans are in default. Now what? 

If your loans are in default, you can get them back into good standing with the Fresh Start program through September 2024. While Fresh Start is the best option currently, borrowers typically have other options for getting out of default: 

• Loan rehabilitation: This option has temporarily been replaced by Fresh Start, but it usually involves making nine monthly payments over a period of 10 consecutive months. The amount you'll pay will be based on your income. 
• Loan consolidation: Consolidation with a Direct Consolidation Loan offers a faster path to getting out of default, but it won’t remove the default from your credit report. To get student loans out of default through consolidation, you must agree to repay your new consolidation loan under an income-driven repayment plan or make three on-time back-to-back monthly payments on your defaulted loan before you consolidate it. 
• Repay the loan in full: While this option isn’t realistic for most borrowers, it will get you out of default in one fell swoop. 

If you have private student loans in default, contact your loan holder to discuss your options. You may be able to get on a modified repayment plan or negotiate a debt settlement. 

You might also consider contacting a student loan lawyer to discuss your options if you’re struggling to pay your loans. Some other useful resources include:

• The Institute of Student Loan Advisors
• Student Loan Borrower Assistance
• National Foundation for Credit Counseling

Dealing with defaulted student loans is stressful, but there are options and resources that can help. Once your loans are out of default, you might consider refinancing them for better rates and terms. Just keep in mind that refinancing federal student loans will cause you to lose access to federal benefits and protections, such as access to income-driven repayment plans.