What Happens if You Default on Student Loans?

The temporary hold on federal student loan payments put in place during the COVID-19 pandemic is set to expire on August 31, 2022, and borrowers will need to begin repaying their loans. Of course, for those who took out private student loans, their loan payments typically weren’t paused during the pandemic — though options like more generous deferment and modified payment plans were often available.

These measures were designed to help borrowers who struggled with their repayment plans due to financial hardships from the pandemic. However, with such measures being phased out, staying on top of student loan debt will once again be on the minds of many people.

As of March 2022, the average monthly payment for a student loan was $460. That’s a hefty bill for many, especially when you also have credit card debt, rent and other essential expenses to worry about.

So what happens if you default on student loans? Both federal and private student loan defaults carry serious consequences. Here’s what borrowers should know about the consequences of default.

How do loans go into default?

The process for a student loan going into default can vary based on the type of loan you have. As soon as you miss the due date for your monthly payment, the loan is considered “delinquent,” or past due. You may have to pay late fees or additional interest. 

If you fail to make a payment on a federal student loan, the delinquent loan can begin harming your credit score after 90 days since the late payment will be reported to credit bureaus. Private loans may be reported as late after just 30 days.

Under federal student loan programs, such as the William D. Ford Federal Direct Loan Program and the Federal Family Education Loan Program, a loan is considered in default if you don’t make any payments for 270 days. However, loans that are part of the Federal Perkins Loan Program (which are being phased out), could be in default before then.

If you have a private loan, the timeline for when your account goes into default will likely be different but will be listed in the loan servicer’s terms and agreements form you signed when taking out the loan. If you’re worried about not being able to make a payment, you should review these terms or contact your lender for more information.

What happens if you default on a student loan?

The consequences of defaulting on a federal student loan can be quite severe. When you default on a federal student loan, the lender will “accelerate” your debt — meaning the entire balance of the loan is due immediately. Also, you’ll lose the ability to apply for additional federal student aid.

To collect your unpaid debt, the federal government may use what’s known as “Treasury offset,” withholding your state and federal tax refunds and Social Security payments. It may also establish wage garnishment of up to 15% from your paychecks. You will be notified before these consequences occur — and in the case of wage garnishment, you can set up a voluntary repayment plan to prevent this.

As with other forms of delinquent or defaulted debt, it’ll be reported to credit bureaus. Having a defaulted account on your credit report will lower your credit score, making it harder to obtain new loans, including mortgages and credit cards.

While defaulting on a loan from a private lender won’t affect your tax refunds or Social Security benefits, it can still create problems for your finances. As with federal lenders, a private student loan servicer will report your delinquent account to credit bureaus.

To collect the debt, the lender will likely send your account to a collection agency. You’ll be responsible for any collection fees and interest charged by the debt collector in addition to the outstanding debt. A lender could even file a lawsuit to ensure repayment through wage garnishment or seizure of assets, depending on what local laws allow.

Because of the severity of defaulting on a student loan, you should actively work with your lender to try to find a solution before you go into default.

How to work with your servicer to avoid defaulting

You can take action before defaulting on your loan to keep your account in good standing. As soon as you’re worried about your ability to make payments, reach out to your lender to discuss available student loan repayment options.

Federal student loan programs offer a variety of options to help borrowers:

• Income-driven repayment plans that can lower your monthly payment to better match your earnings

• Changing your due date

• Consolidating multiple federal student loans into a single payment

You can also apply for emergency forbearance or deferment of your payments. These options temporarily pause your monthly payments. Deferment is typically tied to hardship, such as unemployment or being enrolled in school, while forbearance doesn’t require a specific qualifying event.

You can usually defer a loan longer than you can forbear payments — however, the exact time frame will depend on your lender. It’s worth noting that interest continues to accrue on your account while it’s in forbearance, which can increase your lifetime loan balance. Most lenders also limit how frequently you can use the deferment or forbearance option.

In addition to entering forbearance or deferment, borrowers with private loans may want to consider refinancing. You can refinance to consolidate multiple private student loans into a single payment or to lower your interest rate if you have a good credit score.

Student loan forgiveness is a hot topic in the news, but currently, loan forgiveness is only available to select groups of borrowers. For example, Public ServiceLoan Forgiveness is available for individuals who take out direct loans, make 120 payments and work for a qualifying government or not-for-profit employer.

A Teacher Loan Forgiveness Program is also available for educators who complete five years of full-time teaching at a low-income school. Qualifying individuals can receive up to $17,500 in student loan forgiveness. 

Individuals who become completely disabled or whose school shuts down while they are still enrolled or shortly after graduation may also qualify to have their student loan debt discharged.

Take control of your debts to avoid going into default

Quite often, other forms of debt can make it difficult to pay your federal student loans. However, when you realize what happens if you default on student loans, it becomes clear that skipping these payments isn’t an option. 

By working with your lender to renegotiate your repayment plan, applying for loan forgiveness when available or refinancing to get a better interest rate, you can avoid the consequences of a student loan default.

Carrying significant credit card debt can often add to the stress of trying to pay off your student loans. This is where Tally† can help. The Tally app combined with Tally’s lower-interest line of credit combines all your credit card accounts into a single monthly payment to help you pay off your cards quicker.

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.