Consequences of Default

When are you considered in default on a federal student loan?

You are in default on most federal student loans if you fail to make payments for nine months. The entire loan balance becomes due once you default. A delinquency period begins on the first day after you miss a payment. Your loan holder has certain responsibilities once you are delinquent. During the first 15 days, they must send at least one written notice or collection letter. At some point, they must also let you know about the availability of the Department of Education Student Loan Ombudsman.

The notices and other tactics get worse the longer you are delinquent. If the delinquency goes on for nine months, your loan holder will declare you in default. If you are having trouble making payments, contact your lender sooner rather than later. If you are starting to have problems, you should work with your loan holder to find a more affordable payment plan, postpone payments, or figure out another way to get temporary relief. It is your responsibility to notify your loan holder if you move to a new address.

Consequences of default

The government’s extraordinary collection powers –including the ability to seize money from your tax refunds or social security benefits, and to garnish your wages without a court order–kick in only after you default. Additionally, you will not be eligible for new federal student loans or grants if you are in default on a federal student loan, making it hard to go back to school. Default also hurts your credit history and score, which can make it harder or more expensive to get housing or loans. Collection fees can also be charged to borrowers on defaulted loans, and interest continues to be charged.

There may be other consequences of student loan default depending on the type of loan and where you live. For example, a number of states allow professional and vocational boards to refuse to certify, certify with restrictions, suspend or revoke a member’s professional or vocational license and, in some cases, impose a fine when a member defaults on student loans. 

Temporary protections for borrowers under the payment pause and Fresh Start 

Many of the consequences of default have been suspended during the payment pause. The payment pause, which was put in place due to the covid pandemic, is scheduled to end on December 31, 2022. During the pause, borrowers with defaulted federal student loans have not received collection calls or billing notices and have been protected from having their wages garnished, their tax refunds or social security benefits seized.  Additionally, interest has not been charged on defaulted loans during the payment pause.  

Although the payment pause is scheduled to end at the end of 2022,  the Department of Education has announced additional relief for defaulted borrowers through the temporary Fresh Start program. Fresh Start is a temporary program to eliminate some of the negative consequences of default and provide borrowers with an opportunity to get out of default as the payment pause ends.  

Under Fresh Start, borrowers with eligible defaulted loans will continue to be protected from  collection–including garnishment and offset through the end of 2023. Additionally, borrowers’ loans will be marked as “current” rather than in “collections” for credit reporting during Fresh Start, improving   borrowers’ credit. And eligibility for federal student aid has been restored through the end of 2023, so borrowers with eligible defaulted loans can apply for new federal student aid and grants to go back to school.  

Finally, borrowers with Fresh Start eligible loans will be provided with an opportunity to get out of default entirely through Fresh Start.  More information on how to do that will be available on studentaid.gov here. 

Fresh Start is a temporary program, so If a borrower fails to make payment arrangements within one year after the payment pause ends, they will fall back into default and may be subject to the harsh consequences of default, including the resumption of involuntary collections like wage garnishments, tax refunds offset, and withholding of federal benefit payments. 

Repayment Status of Federal Education Loan Portfolio, Second Quarter FY 2017

In March 2017, 16% of borrowers—but only 10% of outstanding dollars—were in default. In other words, defaulters have lower average balances than other borrowers.