Defaulted on Student Loans: What's Next?

What happens if you default on a student loan depends on a variety of factors. Public and private loans are very different beasts. Your payment options and how you can deal with falling behind are different depending on who is backing your student loan.

In response to the COVID-19 coronavirus pandemic, the US Department of Education has announced that all federally held student loans will automatically set their interest rates to 0% for at least 60 days, as of March 20, 2020. The department has also authorized an automatic suspension of payments for any borrower more than 31 days delinquent as of March 13, 2020. Private student loans are not covered by this announcement.

Can You Go to Jail for Not Paying Student Loans?

To get the most worrisome question out of the way—no, not paying your student loans doesn’t mean you’ll be arrested. But don’t take our word for it: The US Department of Education says so.

That being said, defaulting on student loans can lead to a collections process. Collections can sometimes involve the courts and legal proceedings. Failing to comply with such proceedings, such as not showing up to court, can get you arrested. That’s called contempt of court.

So, if you do default on your loan, you can’t just ignore it after the fact. Which is why it’s important to understand what happens when you default on a student loan so you can take appropriate actions.

What Is Defaulting on a Student Loan?

If you’ve defaulted on your student loan, that means you’ve failed to repay your loans as agreed. That could involve several things:

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You’ve gone too long without making a payment
You’ve violated terms and conditions of the loan
You fraudulently obtained a student loan

The consequences—and what you can do about them—vary depending on the loan type.

What Happens If You Default on a Student Loan?

Typically, federal student loans come with larger grace periods and more flexible options for repayments than private student loans. The government actually offers a number of programs to help keep people from going into default in the first place, as well as options to correct a default. It also takes longer to default on a federal loan.

Delinquent vs. Default

It’s important to understand the terms delinquent and default. Delinquency occurs whenever you fall behind on payments. As soon as you are a day or more behind on a payment, you are delinquent. You remain delinquent until you pay. If the loan provider reports to the credit bureaus, they could report your late payment. That can have a negative impact on your credit score.

Default occurs after a period of delinquency that has not been addressed with payment. According to the Consumer Financial Protection Bureau, private student loans are considered in default if you miss three monthly payments. The Federal Student Aid office notes that federally backed loans are considered in default if you’ve missed your scheduled payments for 270 days or more—that’s around 9 months.

Consequences of Defaulting on Private Student Loans

Private student loans are typically governed by the same laws that other private loans are governed by. That means the lender must follow the Fair Debt Collection Practices Act in attempting to recover the funds. They usually cannot collect from you in ways that include garnishing your wages or levying a bank account without filing a lawsuit and going through the courts.

Whether or not the creditor goes to court to force you to make payments, you still owe the money. Defaulting on your private student loans and failing to do anything about it can have some serious consequences, including:

A lower credit score. Your delinquencies and defaults may be reported on your credit score. Since timely payments account for around 35% of your score, that can mean a hefty drop in your score. Any collection accounts or activity that results from the default can also drop your score.
Legal action against you. If the creditor sues you and wins a judgment, it can then file to garnish your wages or levy your bank accounts to get its money. That can result in a sudden lack of income and potentially serious financial distress for you.

Consequences of Defaulting on Federal Student Loans

Defaulting on a federal student loan can come with even heftier consequences. This is in part because the government provides so many options for paying back student loans that it sees default as an extremely serious issue.

Before you default on a student loan, you have options such as deferment and forbearance, which allow you to put off your loan payments legally. You can also apply for different loan repayment options that are right for your income. Plus, you have that nine-month grace period to figure out how to catch up before the government considers you in default.

Once you’re in default, though, you lose all of the benefits that come with your federal loans. That includes deferment, forbearance, options for repayment plans, future federal student aid and eligibility for loan forgiveness programs.

If you default on federal student loans, you’re not automatically out all those benefits forever. You might be able to reclaim some of those benefits by correcting the default via loan rehabilitation or loan consolidation.

If you don’t take action to repair your default, though, you could experience other consequences. Lenders of federally backed loans don’t have to go through the courts before taking action, either. They can:

Report the default to the credit bureaus, which hurts your credit
Put levies on certain assets, including a home
Confiscate your federal tax refunds or other benefits
Garnish your wages
Take you to court

In some cases, schools might hold records, including academic transcripts, if someone has defaulted on federal student loans. This can make it harder for you to get a job or seek continued education.

A Note on Loan Servicers: Your federal student loan was assigned to a loan servicer, which handles your payment options and will help you with any issues you experience. The Department of Education itself does not handle these, and you should never pay another organization to “help” you with your federal loans—your loan servicer will help you for free. Your loan may be transferred from one servicer to another, but every servicer owned by the Department of Education is subject to the same rules and regulations. Some federal loans are owned by commercial lenders or other lenders, so make sure you understand the terms when you apply.

How to Get Out of Student Loan Default

For Private Loans

How you correct a default on a private student loan depends heavily on the lender. You should contact them as soon as possible to find out whether they will accept a new payment arrangement. In some cases, if you can cure the default, the lender might agree to allow you to keep making normal monthly payments in the future.

Private education loans are subject to statutes of limitations, meaning there’s a point at which it’s illegal for a lender or collector to sue you over an unpaid debt. You still owe the money, but you can no longer be sued over it. Here’s a list of statutes of limitations by state.

For Federal Loans

Federal student loan borrows have three options for getting out of default.

Pay the full amount of the loan.
Enter a Loan Rehabilitation Agreement.
- The details of loan rehabilitation differ for each federal student loan program.
- They typically require you to make nine monthly payments as agreed upon.
- The agreed-upon payments might depend on your current income.
- Once you comply with the terms for nine months, your loan is considered rehabilitated and the default status is removed.
- It’s important to note that rehabilitation is a one-time option—you can’t go through it again if you default later.
Apply for a Direct Consolidation Loan and include the defaulted loan in the consolidation.
- Before you consolidate the loan, you must make three on-time payments in a row or agree to an income-driven repayment plan.
- If a wage garnishment or other court order is in place regarding the defaulted loan, you must get the order lifted before you can include it in a consolidation.

How to Avoid Defaulting on Your Student Loans

As you can see, getting out of default can be a tedious process regardless of which type of loan you have. And allowing the default to move forward by doing nothing can cause serious financial consequences. It’s much better to avoid default altogether if possible. Here are some tips for doing so.

Make sure you fully understand your student loan agreements. While federal student loans typically don’t come due until you graduate, that’s not the case with every loan. Make sure you know exactly when and what you have to pay so you don’t fall into default without realizing it.
Read all notices from your student loan lender as soon as possible. Sign up for online notices if possible. That way, you never miss an important update because you moved.
Contact your lender as soon as you see that payments are going to be tough to make. This is especially true for federal loans, as they come with a wide variety of options to help ensure you can afford them. Private lenders might be willing to work with you as well, even if it’s just changing the due date each month so you’re not paying your student loan and rent out of the same paycheck.

Bottom line: Avoid default if you can. As soon as you think you might have trouble making student loan payments, contact your student loan servicer about your options for making those payments more affordable. And remember, student loan repayment has a significant impact on your credit standing—and various aspects of your day-to-day life—so you’ll want to stay on top of it.