What Really Happens When You Default On Your Student Loans

The fact that millions of people in the United States have student loan debt, to the tune of more than $1 trillion dollars, can make it feel like an unpleasant, but common-enough experience of everyday life.

Because interest rates on student loans are often lower than those for consumer debt (credit cards most notably), many people reasonably shrug it off as something to live with long-term. However, those with much more sizable debt burdens — as a result of a ton of schooling, predatory lending, or economic hardship — may not be as easygoing.

If your student loan debt balloons to the point of a default, you do have a few options — though there may be some hard knocks along the way. Here are some things to expect.

Generally, your account is considered delinquent after one missing payment, and it can be brought current again by paying the past-due amount. Defaulting is the next step, and it occurs when you haven't made a loan payment by the due dates in your agreement. Typically, that may be a non-payment for 180 days or more (unless a deferment was agreed to), but in some cases, a default may be declared even sooner.

"For a direct loan, you are considered in default after 270 days — about nine months — while under the Perkins loan, you could be in default as soon as you miss a scheduled payment," explains Rachel Rabinovich, the director of financial planning at Society of Grownups. "Private student loans could be considered in default for a few reasons: Depending on the loan servicer, a default status could be triggered after 90 days — three months — of not paying, or as soon as a payment is missed."

Defaults can also happen by proxy, she adds. If you have a co-signer on a private loan, you could be considered in default if the co-signer files for bankruptcy or dies. (See the distressing case of Marcia DeOliveira-Longinetti, who continued to be on the hook for her son Kevin's loans, even after he was killed in 2015.) Or, if you file for bankruptcy or default on a different loan, your private student loan could go into default as well.

"It's always a good idea to make sure you understand your particular loan servicer's policies since they can differ from lender to lender," she says.

This is a tantalizing idea that may stem from the fact that some people may have this option — under very specific circumstances. Nonetheless, Teri Williams, the president and owner of OneUnited Bank, avers that student loans, private or federal, "cannot be discharged or 'erased' without payment in full."

There are some loan forgiveness programs for people who qualify (in many cases that includes teachers and public service employees), but the terms can be rigid — not to mention, some payments must usually be made by working in that field for a specific amount of time beforehand. Student Loan Hero has a list of some programs to explore and it would be wise to triple-check that with your loan servicer, as the terms may change.

There are many cases of people who thought they qualified for loan forgiveness, but had the wrong kind of loan. Others looked forward to kissing their loans goodbye, only to discover they were enrolled in the wrong kind of payment plan. And, still, others learned that the government had changed the rules over time.

The relationship between loan servicers and borrowers feels inherently adversarial, but Rabinovich discourages thinking that way. "They are there to help you and the earlier you reach out, the more options they'll have," she says. "They don't want to deal with the paperwork and mess any more than you do."

Do your best to negotiate with your lender rather than defaulting on your loans, Williams advises. Explore different repayment plan options before you contact your servicer, and explain your situation; there may be options you don't know about to decrease the burden in some way. While they can eventually pursue legal routes to recoup the money, she says that "most lenders prefer to modify terms to make it possible for you to make regular monthly payments rather than taking you to court to obtain a judgment."

Ah, the nuclear route. Declaring bankruptcy might seem like a feasible, if undesirable, way of deflecting student loans, but it is not. In fact, it is an extremely difficult option for the vast majority of people.

The threshold for using bankruptcy as a means to obtain loan forgiveness is so high that it almost requires a borrower to say they are, and will be in the foreseeable future, completely destitute. So, even if you succeed in declaring personal bankruptcy, you may still have to pay back your student loans, Rabinovich says.

Delinquency and defaulting can impact someone's life in a surprising number of ways, says Williams. The reach can extend from lowering a person's credit score to making it harder for them to qualify for a home mortgage, car loan, open a credit card, buy or sell real estate, or even finance a new iPhone.

"Defaulting on federal loans could make it impossible for you to participate in other federal loan programs," Rabinovich adds. "For example, defaulting on a federal loan would likely disqualify you from receiving an FHA Loan (Federal Housing Administration). FHA Loans are popular with first-time homebuyers due to their minimal down payment requirements." So, even if you manage to get approved for a mortgage or loan in general, it will likely be at the highest interest rates.

Many employers run credit checks and having poor credit could jeopardize professional opportunities for you, Rabinovich says. It's an incredibly frustrating conundrum: Defaulting or being delinquent may make you ineligible for forbearance or deferment of federal student loans, and some schools have the right to withhold your transcript, she adds. (As if hampering someone's career prospects would make it easier to pay off their loans...)

And in extreme, but not-uncommon cases, some employers may garnish an employee's wages. A creditor or bank would need to sue you and obtain a judgment and court ordered default to do so, Williams says, but once a default is entered, the bank can identify your employer and begin garnishment.

"Once you have defaulted on your federal loan, the lender will turn to a collection agency, which will typically offer you a plan to repay your loan," Rabinovich explains. "If you refuse to enter into a voluntary repayment agreement or you do not make payments according to the agreement, the collection agency may then begin the process of garnishing your wages."

You will receive a notice, 30 days prior, telling you that your employer will garnish up to 15% of your disposable income — after-tax/take-home pay. "Even then, you still have time to work out a repayment plan before the garnishment starts. Otherwise, your wages will be garnished until the loan is repaid in full, or you are out of default," Rabinovich adds.

If there are multiple federal student loans in default, the total wage garnishment must be the lesser amount between 25% of your disposable income, or the amount by which your disposable income exceeds 30 times the federal minimum wage of $7.25. (See this example of how that figure is calculated.)

"If your loan is private, the creditor must first get a court order to garnish your wages, which would then be submitted to your employer," Rabinovich says. "The rules here are the same as if you default on any other consumer debt and the amount garnished depends on state laws."

Finally, lenders have the right to implement a "Treasury offset," she notes — withholding money from your tax refund, Social Security payments, or other federal payments. Borrowers will be given a 65-day notice beforehand and can request a review of that act before it occurs. She suggests visiting the Department of Education’s Federal Student Aid website to understand your rights and learn more about wage garnishment and Treasury offsets.

Diving in however you can, as soon as you can. Both Williams and Rabinovich advise people with student loan difficulties to rip off the Band-Aid and contact your lenders.

"No matter whether your defaulted loan is federal or private, always contact them as soon as possible," Rabinovich says. "The sooner you reach out, the more options you will have for correcting it."

She notes that the Department of Education has several options for helping you get back on track with your federal loans including full repayment (though that probably isn't a feasible option if things are too far gone), loan rehabilitation, or loan consolidation. "Each option has its benefits and drawbacks so it's best to work with your lender to figure out the best solution for you."

Private lenders are not required to offer options such as an adjusted payment plan or a deferral, she says, but they may do so for the sake of getting what is owed however they can.

"Even if the loan has been sent to a collection agency, they may be willing to work with you, too. It never hurts to ask!" she says. "Other options might include settling the debt with the collection agency or refinancing with the help of a co-signer depending on how long it's been since you've been in default. [But] with any repayment option given to you, it is imperative that you make future payments on time as you agreed to."

Finally, if things are dire, she advises that you consider your legal options and consult an attorney. You may be behind on payments, but you are not required to put up with harassment or abuse. Read about your rights and obligations under the Fair Debt Collection Practices Act.