The Impact of Defaulting on a Student Loan

Defaulting on student loans is a fairly common occurrence, although it's one that can have dire consequences for a borrower's finances and future lifestyle. That said, the COVID-19 emergency relief in place since March of 2020 protects borrowers with federal student loans from some potential impacts of default, such as wage garnishment and withheld tax refunds.

The emergency deferment was scheduled to end on Dec. 31, 2022. It has since been extended to the earlier of:

• 60 days after the Department of Education can implement the Biden Administration's student loan forgiveness plan, or the current litigation over the plan is resolved; or
• 60 days after June 30, 2023

When the emergency deferment expires, borrowers will need to begin making payments on their loans once again. If you are worried about being able to make those payments, you should have an understanding of the impacts of defaulting and what you can do about it before it's too late.

Read on to learn what happens when you're significantly behind on the payments for your student loans, whether you have federal loans or private student loans.

What Happens if You Default on Federal Student Loans?

If you let your federal student loans go into default because you fail to make scheduled loan payments for at least 270 days, an array of consequences can come into play. These consequences, which are outlined on the Federal Student Aid website, impact:

• Acceleration: When your federal student loans are in default, the entire unpaid balance of your loan plus all interest you owe becomes immediately due, a process known as acceleration.
• Federal benefits: Defaulting on federal student loans means losing access to federal protections like deferment and forbearance.
• Flexibility: Defaulting on federal student loans means giving up the chance to choose your own payment plan or switch student loan repayment plans. You also lose access to income-driven repayment plans.
• Federal student aid: You are no longer eligible for federal student aid once your loans go into default.
• Credit score: Late payments on federal student loans can actually be reported to the three major credit bureaus 90 days after you're late, which is well before you're officially in default. This damages your credit score and makes it difficult to get a credit card, car loan, or mortgage.
• Treasury offset: Through a process called treasury offset, your tax refunds and federal benefit payments may be garnished or withheld to repay overdue student loan balances.
• Wage garnishment: The federal government may garnish your wages in order to help cover your student loan payments.
• Legal problems: Your loan servicer may take you to court, which can lead to you having to pay court fees and other legal expenses.
• Other issues: The school you attended may withhold your transcript, which can make it difficult to get into another institution of higher education. It's also possible you could be barred from purchasing or selling real estate and other assets in some scenarios.

According to Federal Student Aid, you should reach out to your student loan servicer if you're having trouble making payments or you want to find out how you can get your student loans out of default. Loan servicers are required to notify you of options such as forebearance or income-based repayment plans.

Borrowers with federal student loans in default can also use loan rehabilitation or loan consolidation to get their loans out of default and get back on track.

What Happens if You Default on Private Student Loans?

Borrowers with private student loans face a different set of rules when it comes to late payments. Borrowers with private student loans must follow the rules and guidelines set by their student loan provider, and the consequences of missing loan payments can vary from lender to lender. 

If you miss a payment with a private student loan company and it's been 90 days or longer, your student loans are considered in default. According to the Consumer Financial Protection Bureau (CFPB), you can also default on private student loans "if you declare bankruptcy, default on another loan, or die."

In the event 90 days or longer of missed payments have passed, your default will be reported to the credit bureaus. If you continue to miss payments, your student loan debt will likely be sent to a collections agency.

Like with federal student loans, you may also be sued by your lender if you fail to repay the money that you borrowed to fund your education. This can mean being on the hook for court costs and other legal fees in addition to the principal of your loan balance and all interest that has accrued.

The CFPB says that, if you believe you may have trouble making payments on private student loans, you should reach out to your loan provider right away. Doing so can help you determine if switching repayment plans is an option or if your private student loan servicer offers a temporary forbearance or unemployment protection program.

Frequently Asked Questions (FAQs)

The Bottom Line

The impact of defaulting on a student loan can be devastating and it can take years to repair the damage to your credit score and your finances. If you're worried about missing payments or you're suffering financial hardship of any kind, your best bet is taking action now, even if you haven't missed a student loan payment yet.

By reaching out to your loan issuer and talking over your concerns, you can find out what options are available to help you avoid default in the short-term. With some smart planning and enough time on your side, you may be able to get back on track and avoid the worst consequences of letting student loan payments lapse.