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What Happens When You Default On Your Student Loans? And What You Can Do To Avoid It?

Last updated 03/19/2024 by

Julie Bawden-Davis
Each day, 3,000 borrowers default on their student loans in the U.S., according to the Consumer Federation of America. With federal student loan debt at $1.3 billion, many students are finding they can’t keep up with payments. In other words, they’ve failed to make scheduled payments for 270 days (nine months). But what happens when you default on your federal student loans?
If you’re struggling to make regular payments on your student loans, think twice before joining the default bandwagon. The long-term financial consequences of not paying back your loan may shock you.

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Possible consequences of defaulting on your federal student loans

The results of defaulting are serious and sometimes irreversible. For starters, your credit score will take a huge hit.
That will affect your ability to get approved for more credit and loans. And when you do get approved, you’ll pay high interest rates. It will also make it challenging to make big purchases, such as a car or house.
Defaulting on your student loans can also make it difficult to pass employment verification checks, get a decent cell phone plan, and rent an apartment without a cosigner.
Not sounding too bad quite yet? Hold on. That’s just the beginning.

Defaulting on student loans isn’t the same as defaulting on a credit card

Unlike defaulting on a credit card, which can trash your credit score for several years, failure to pay your federal student loans can haunt you for decades.
Keep in mind that you’re attempting to evade the federal government. Uncle Sam has a much longer reach than any credit card company.
Craig P. Anderson is the president of Student Connections, an award-winning nonprofit that assists students who have defaulted or are about to default on their loans. He says, “If being delinquent isn’t enough to catch a borrower’s attention, the consequences of defaulting certainly will.”
And he’s right. The consequences you might face when you default on your student loans is enough for most people to want to avoid it at all costs.

What happens when you default on your student loans?

Anderson shares what some of those consequences are:

  • The government will demand that the outstanding loan principal and interest be paid. No more monthly payments. If you don’t pay, you could be sued. When that occurs, you must pay court costs, legal, and collection fees.
  • Forget about ever taking out any more federal student loans. You also lose eligibility for loan deferment or forbearance.
  • You’ll be reported to credit bureaus, damaging your long-term credit rating. That’ll make it difficult to buy a car or house.
  • Your employer will take part of (garnish) your regular paycheck. The money will go toward what you owe. This will occur as long as you’re employed and have a student loan balance.
  • The IRS will withhold any tax refunds and apply them toward your loan balance.
  • Your school may withhold your academic transcript until you repay your loan.
  • Late fees, accrued interest, and collection costs will increase the amount that you owe.

What about bankruptcy?

Many people want to know if declaring bankruptcy will get rid of their student loans. I’m going to answer this question very quickly and simply.
If you think bankruptcy might be your escape route, don’t. While it may be possible under very specific circumstances, it is very unlikely that a court will discharge your student loan debt under bankruptcy.
You can’t ever discharge a federal student loan in bankruptcy. The loans follow you around until you repay them.”
Anderson says, “You can’t ever discharge a federal student loan in bankruptcy. The loans follow you around until you repay them.”

Are you at risk of defaulting on your student loan?

Here are some signs you may be headed toward default:
  • It’s getting progressively more difficult to pay.
  • You’ve missed a few payments.
  • Your budget is so tight that you’re constantly on the brink of not being able to make payments.
  • Your interest rate has risen, and the new payment amount is too high for you to afford.

What to do if you’re about to default

First of all, don’t panic. The fact that you haven’t defaulted yet is good news. If you can swing it, make a payment immediately. This will prevent you from going into default.
Then, see if you qualify for any of these federal student loan assistance programs.

Student loan forgiveness

One of the benefits that’s exclusive to federal student loans is the option for student loan forgiveness. Unlike private student loans, you can get all or part your federal loans forgiven under certain circumstances.
Among these programs are public service loan forgiveness, teacher loan forgiveness, federal Perkins loan cancellation, and total and permanent disability discharge.


An easy way to stop required loan payments in their tracks is to go back to school.
According to the U.S. Department of Federal Student Aid, if you enroll at least half-time in an eligible college or career school, your loan automatically goes into deferment. Some loan types require that you pay interest during deferment.
For other types of deferment, you need to qualify and apply. You’re eligible if you’re:
  • Unemployed and unable to find employment
  • In an approved rehabilitation training program for the disabled
  • Experiencing economic hardship
  • Serving in the Peace Corps
  • Active duty military involved in a war, operation, or national emergency


There are two types of forbearance: general and mandatory.
General forbearance may be granted if you can show that you’re unable to pay because of medical expenses, financial difficulties, or a change in employment status.
Mandatory forbearance applies in a variety of circumstances, such as if:
  • People serving in a medical or dental internship or residency program
  • You’re in an AmeriCorps position
  • Members of the National Guard
  • What you owe is 20% or more of your gross income
You may also qualify if you’re in a teaching position that qualifies for loan forgiveness.

Apply for an income-driven repayment plan

Income-driven repayment plans create payment schedules that fit within your current income level.
There are currently four options: Pay as You Earn (PAYE), Revised Pay as You Earn (REPAYE), Income-Based Repayment (IBR), and Income Contingent Repayment (ICR).

Paye as You Earn (PAYE)

Also known as the “Obama Student Loan Plan,” with this program you pay 10% of your discretionary income. You qualify for this only if your student debt is higher than your discretionary income or comprises a significant amount of your annual income. This program only applies if you have certain loan types.

Revised Pay as You Earn (REPAYE)

This program is a revised version of PAYE. It covers more borrowers and there are fewer limits on loan types and when they were given. No matter how much your income grows, you won’t be expected to pay more than 10% of your gross income.

Income-Based Repayment (IBR)

With this program, your monthly payments are capped at 15% of your disposable income. When your income is low enough, you could get a monthly payment set at zero. After you make payments for 25 years, including zero payments, the remainder of the loan is forgiven.

Income Contingent Repayment (ICR)

With this program, you pay 20% of your discretionary income, or an alternate payment according to your adjusted income, whichever is less. This is the only income-driven repayment option available to those with Parent PLUS student loans.

What if you’re already in student loan default?

If you’ve already defaulted, your options are more limited, but you do have some. Federal student loan consolidation is one of them.
It’s possible to consolidate federal student loans under the Direct Consolidation Loan program, even if your loan is in default. This is a good option if you have several student loans. The interest rate is averaged out to create a new rate.
Refinancing can be a good idea. You can use it to lower your interest rate and reduce your monthly payment.”
This option only works if your new payment is lower than your current one. You can’t use this option for private student loans.
The other option is to refinance with a private student loan. Many people find this route to be the best one for their situation.

Refinance with a private student loan

In many cases, your best option is to refinance with private student loans.
You can use private student loans to combine private and federal loans. Anderson says, “Refinancing can be a good idea. You can use it to lower your interest rate and reduce your monthly payment.”
The truth is, private student loans may be your only option to break the downward spiral of student loan default. Use a private student loan to pay off your defaulted federal student loan, and you can stop the late fees, accrued interest, and collection costs.
You might have to pay a high interest rate for a private student loan because of your default status, but you’ll stop Uncle Sam from knocking at your door demanding payment.
There are a wide variety of private student loan lenders to consider. Check out SuperMoney’s reviews page to review and compare all the top lenders.

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Julie Bawden-Davis

Julie Bawden-Davis is a widely published journalist specializing in personal finance and small business. She has written 10 books and more than 2,500 articles for a wide variety of national and international publications, including, where she has a weekly column. In addition to contributing to SuperMoney, her work has appeared in publications such as American Express OPEN Forum, The Hartford and Forbes.

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