Written By Kevin Payne
Updated on December 24, 2021
Student loan default means that you failed to repay your student loans according to the agreed-upon terms. Nearly 6 million federal borrowers have loans in default, totaling over $125 billion in outstanding student debt.
For most federal student loans, this means you didn’t make scheduled monthly loan payments for at least 270 days. Defaulting on student loans can lead to your debt ending up in collections or even to lenders suing you. It can affect your finances and life circumstances for years.
If you default on federal student loans, you lose access to benefits like deferment, forbearance, and loan forgiveness. The good news is that you can still be eligible for student loan forgiveness, depending on how you respond to being in default.
Private student loans don’t have forgiveness programs, but there may be a tiny chance you can get your loans forgiven.
Here’s a guide on how to pursue forgiveness for defaulted student loans.
Defaulted student loan forgiveness for federal loans
To pursue loan forgiveness for federal student loan debt, you’ll need to get your student loans out of default.
You can get your student loans out of default in one of three ways: loan rehabilitation, loan consolidation and paying them in full. Only rehabilitation and consolidation are eligible for loan forgiveness because paying your loans in full would leave no remaining debt.
Loan rehabilitation
Loan rehabilitation requires signing an agreement to make nine monthly student loan payments over a 10-month period.
Payments are income-based and determined by your loan holder. Depending on your income, loan rehabilitation payments can be as low as $5. Payments must occur within 20 days of the due date.
Once you make your nine monthly payments, your loan is no longer default. You regain access to all the benefits you had before, including loan forgiveness.
Eligibility for most federal student loan forgiveness requires being on an income-driven repayment (IDR) plan. If you weren’t already using one of these repayment programs before you defaulted, you’ll need to sign up for one now.
Payments made while in default don’t count toward any loan forgiveness requirements.
Loan consolidation
The other option for getting student loans out of default is loan consolidation. With loan consolidation, your original student loans are paid off. Those loans are replaced by a new Direct Consolidation Loan with new loan terms and a new interest rate.
When you consolidate to a Direct Consolidation Loan, your loan will no longer be in default. You’ll once again gain access to student loan forgiveness programs, along with other federal benefits.
How to qualify for consolidation after defaulting on your student loan
Most federal student loan borrowers can qualify for loan consolidation but you must meet certain eligibility requirements. When you default on loans, you must complete one of these two actions to qualify for consolidation:
1. Repay your new Direct Consolidation Loan under an income-driven repayment plan and make qualifying payments.
2. Make three consecutive, voluntary, on-time, full payments on your defaulted loan before consolidating.
Keep in mind that while your loans are in default, your loan holder may choose to collect payments through wage garnishments from your paychecks or Treasury offset from your tax refund.
Income-driven repayment
Getting on an IDR plan is required for most loan forgiveness programs, so it makes sense to choose to repay your consolidation loan on one of these plans. Payments are based on a percentage of your discretionary income (10 to 20 percent) as well as family size.
IDR will most likely lower your monthly payments, leaving more debt to be forgiven. On any of the four IDR Plans, your remaining balance will be forgiven if there is anything left after your repayment term of 20 to 25 years. That's one way to get student debt forgiveness but if you work in the public sector or nonprofit organization, you may also qualify for the Public Service Loan Forgiveness Program (PSLF). Under this program, the federal government will discharge your loans after 10 years of service.
Defaulted student loan forgiveness for private loans
Private student loans work differently than federal loans like Direct Loans or Perkins Loans. Defaulted student loan forgiveness or loan cancellation doesn’t exist for private student loans because there’s no incentive for private lenders to offer student loan forgiveness to borrowers.
When you default on private student loans, private lenders are less likely to help out than a federal student loan servicer. Some private lenders offer deferment and forbearance options, but this is rare.
Private loan forgiveness
In rare instances, private student loans can be forgiven. Some states have a statute of limitations on how long lenders have to sue you. For example, creditors in the state of New York have six years to file a lawsuit against you.
Even if you’re past the statute of limitations, however, that doesn’t mean that your loans are forgiven. It simply means, in the example with New York, that they just can’t bring legal action against you. Creditors and lenders still may call and send notices after that time. Plus, the damage is already done to your credit for years to come.
A student loan lawyer can help
If you find yourself in a situation where your private student loans are in default, your best option is to find a good student loan lawyer to help you make the right moves.
Why getting student loans out of default matters
Getting your student loans out of default is vital if you want to pursue student loan forgiveness. But it’s also important because you need to remedy the negative financial effects that come with defaulting on student loans.
Here are some of the ways that defaulting on student loans can damage your finances:
- Credit history and score: The loan holder may report your loan default to credit bureaus, which can lower your credit score. Defaulted loans stay on your credit report for up to seven years.
- Cosigner: If you secured your loan with a cosigner, your default can lower their credit, too.
- Loss of benefits: Defaulted loans no longer have access to deferment, forbearance or the ability to choose between repayment plans.
- Ineligible for more aid: Defaulting on a loan cuts you off from pursuing more financial aid options.
- Transcript: Your school may withhold your transcript until your loan is out of default.
- Wage garnishment: Your employer may withhold part of your paycheck to repay your defaulted loan.
- Treasury tax offset: The IRS may withhold part or all of your income tax refund to repay your defaulted loan.
- Assets: In some instances, you can't buy or sell assets, like a house.
- Lawsuits: Loan holders may choose to sue you for failure to pay your loans.
- Loan acceleration: When you default on a loan, the entire loan balance, including interest, is due immediately.
As you can see, there are long-term consequences associated with student loan default. It’s in your best interest to avoid defaulting on loans in the first place. But if you find yourself in this situation, work hard to get your loan out of default to reduce the amount of financial damage.
Get help with a customized repayment plan
Whether your loans are in default or not, repaying student loans can be tricky. If you’re struggling to find the best way to repay your student loans, Student Loan Planner® can help.
Our student loan consultants have partnered with thousands of people to create customized repayment plans. We can find a repayment strategy that fits your needs and lifestyle.
Not sure what to do with your student loans?
Take our 11 question quiz to get a personalized recommendation for 2024 on whether you should pursue PSLF, Biden’s New IDR plan, or refinancing (including the one lender we think could give you the best rate).
