What Happens When You Default On Student Loans?

Asher Wu
Apr 22, 2021

What would happen if you didn't make your student loan payments on time? Well, you'd default. The thing about defaulting on your student loan payments is that you don't want to, but sometimes it's inevitable. And since we want you to stay accountable for your payments, we're explaining exactly what happens when you don't pay your student loan payments on time.

Life can take unexpected turns that make paying back student loans incredibly difficult - like when we are laid off or have fallen ill. Unfortunately, missing a handful of payments can switch our account into “default” status, which can make our financial situation even worse (Forbes).

What is student loan default?

This occurs when full payments on student loans are not being made for 270+ days.

What is the process like?

The initial step towards a student loan ‘default’ is missing that first payment, which sends your account into delinquency. When you’re sitting in delinquency due to late or missed payments, it is reported to the credit bureaus (also known as consumer reporting agencies on the promissory note you signed).

This can put a dent in your credit score. Even if you only miss one monthly payment and continue to make regular payments again, your loan account stays delinquent until the past due amount is repaid or other arrangements are made.

After 9 months of being delinquent, your loans shift into ‘default.’ A collection agency will then work to recover what they can get back, which can have major consequences for the borrower. When you are set in ‘default,’ it implies a breach in contract. This is when they might declare that the full balance of a loan is due ASAP. Yikes.

Consequences of student loan default

Penalties: Financial penalties known as “collections charges” can have major implications for borrowers. The federal law allows high collections charges and penalties to be assessed on defaulted federal student loan balances. On the other hand, the penalties involved in defaulting on private student loans depend on the contract.

Credit Damage: Nobody wants a negative mark on their credit report, which is an immediate consequence of student loan default that can absolutely tank your credit score.

Worst of all, negative credit reports are sent to major credit bureaus while you’re in default, which blazes a path of destruction through your credit history. This can make renting an apartment or getting approval for a mortgage a real problem. Even job prospects may require credit reports, and this issue can severely ruin your chances.

Litigation: A severe consequence is a lawsuit. This is fairly uncommon for federal student loan lenders since the government has many powerful collection tools at their disposal. However, private student loan lenders commonly sue borrowers who default in state court.

Emotional Turmoil: There is an emotional weight of failing to pay bills that haunts default borrowers. This can ruin personal and romantic relationships by adding additional stress.

Wage Garnishment: This would mean that lenders seize money directly from borrower’s paychecks. This is not ideal when you are living paycheck-to-paycheck, and can be a real financial danger. Now, a lender’s ability to garnish wages “depends on the type of student loan, its status, and the intersection of federal and state law.”

The Treasury Offset Program

Tax Refund Seizures: Here, the federal government can go after and intercept federal tax refunds of federal student loan borrowers. The Treasury Offset Program allows the IRS to seize refunds and apply them to your federal student loan debt. Luckily, this does not apply for private student loan lenders - private lenders cannot take your federal tax refunds through these means.

Social Security Offset: In some cases, the Treasury Offset Program allows the federal government to seize a portion of your Social Security payments, which can have devastating effects on older borrowers with a fixed income. These consequences can have serious and long-lasting effects on the rest of your life. There are ways to get out of a student loan default, but the best thing you can do is come up with a plan to avoid falling into default.

Student debt can easily slip out of control, so learn what you can do to prevent losing sight of your financial goals. 

Other solutions

If you're stressed about paying your student loans, and fearing you might default due to your payment being too high and unmanageable, consider refinancing your student loans.

Not only can you lower your monthly payment, but you can often times get a lower interest rate and start making a dent in your student loan debt. Sound too good to be true? Use our student loan refinance calculator to see what you could save. 

what happens when you default on your student loans