Student Loan Default Explained

First of all, let's make sure we understand what "default" means.  If your loan is in default, it means that you have not made payments on your student loan as scheduled.  Typically, for federal student loans, a loan will go into default when payments have not been made for 270 days (9 months).  Private student loans may go into default as soon as 90 days after no payments have been made.  It's important to check your own loan documents to understand when default occurs.

Why is loan default and avoiding default such an important concept to understand?  Student loan default can and will have significant negative consequences to your financial health.

Unfortunately, there is no way to sugar coat it.  If your student loans goes into default, the entire amount may become payable immediately, you may lose eligibility for all future financial aid, and your credit score will take a huge hit that will take you years to recover.  If your federal student loan goes into default, the government can take some of your tax refund, and they can even force your employer to withhold part of your paycheck to pay down the loan (wage garnishment).

Have I convinced you that you want to avoid a default at all costs?

We all know that life happens.  An unexpected medical bill, costly car repair, or a lost job can significantly disrupt our monthly expenses.  The risk from these scenarios can be reduced by having the right insurance and emergency funds, but with so many Americans living paycheck-to-paycheck, these situations are all too real.

Sometimes, mistakes happen.  A statement may have been missed, or you may have forgotten about the student loan you took out your freshman year of college.  Most borrowers have a grace period of 6-9 months before loan payments are due, and it can be easy to forget when the grace period is ending.

What happens when you can’t pay your student loans?

As soon as you miss a payment, but before a loan is considered in default, the loan is considered delinquent.  A delinquent loan can still have negative consequences to your credit score, but it is not as severe as default.

Before you enter into default, it's best to take as many steps as you can to prevent that from happening.  Contact your loan servicer (Navient, Sallie Mae, MOHELA, Great Lakes, etc.) if you cannot afford to make the minimum payments each month.  By explaining your situation, you might be able to qualify for a deferment or forbearance on your loan.  These programs will stop your monthly payments, although interest will still build up while you are not making payments.  This might add on extra cost to your loan, but you will avoid the more severe costs of default.

Explore income-driven repayment plans which will usually reduce your monthly payments.  Consolidating your loans can also be another way of reducing your monthly payment, but will extend the life and cost of your loans.

It's worth repeating that reducing your monthly payment by extending the loan term, or stopping payments temporarily by applying for a deferment or forbearance, will cost you extra, but it can give you the breathing room you need to get your feet back underneath you. Once other expenses are reduced or income is increased, start paying extra towards your loans to keep the costs low.

I'm already in default!

If you have a student loan in default, first take a deep breath.  Yes, this is a serious situation that requires some thought and planning, but it's not the end of the world, and you are not alone.

Now that you've collected yourself, it's time to focus on getting out of this situation as quickly as possible.  Your first task is to call the loan servicer, explain your situation, and ask for their help.  A few options exist to remedy a default.

1. Pay in Full

Chances are, if you weren't making your payments before, you probably can't afford to repay the defaulted loan in full, but it's still an option.  If you've secured funds from another loan or a family or friend, they can be used to fix the default.  Side note, I do not usually recommend getting loans from family or friends, or loaning money to family or friends for that matter.  It's not worth risking the relationship.  Gifts are a different story.

2. Loan Rehabilitation

If you've made a mistake and found yourself in default on a Direct or FFEL federal loan, the Department of Education may offer you a chance to fix the default by entering into what’s called a "Loan Rehabilitation" program.  By making 9 consecutive monthly payments, the default status will be removed.  The default will also be removed from your credit report.   You can only qualify for loan rehabilitation once, so it makes a great option for borrowers that may have made a mistake on their payments.

3. Loan Consolidation

Another option to fix a defaulted federal student loan is to consolidate within a Direct Consolidation Loan.  The Direct Consolidation Loan will pay off the defaulted loans and create a new loan with, most likely, a lower monthly payment


To conclude, the most important takeaway is to avoid default at all costs.  If you find yourself in default, there are ways to remedy the situation.

  1. Before your loans go into default, explore repayment plans to lower your monthly payment amount if you are struggling.
  2. Call your loan servicer and explain your situation
  3. If eligible, pursue a Loan Rehabilitation Program.