What Happens If I Default on My Student Loans?

 More than 1.1 million Americans defaulted on their federal student loans for the first time last year. When you default on federal student loans, the consequences are severe and can affect several areas of your life. You may experience consequences that include:

• Wage garnishment: The Department of Education can garnish up to 15 percent of your disposable pay. Unlike private collectors, the Department of Education does not need a judgment to garnish your income.
• Your balance increases: Your remaining balance immediately becomes due once you default. Unpaid interest and collection fees may also be added to your balance. The latter is especially true for borrowers with FFEL loans.
• Reduced credit score: Loan servicers will report you to the three credit agencies if your loans remain delinquent for too long. You are also reported to the three credit agencies after defaulting. This can significantly lower your credit score. Having a low credit score can make it more difficult to secure employment, housing or other lines of credit.
• You lose eligibility for financial aid: You are not eligible for federal financial while your loans are in default. Defaulting on your loans may cause problems if you plan on returning to school.
• You lose eligibility for repayment plans: One of the major benefits of most federal student loans is that you can take advantage of income-driven repayment plans. You lose these options after defaulting on your student loans. In addition, you also no longer qualify for economic hardship deferments or forbearance.

Can I Get My Student Loans Out of Default?

Depending on your situation, it may be possible to get your federal student loans out of default. Borrowers generally have two options available - the Education Department's loan rehabilitation program or converting your loans into a Direct Consolidation Loan. Both options may have pros and cons that are dependent on your individual situation.

If you choose loan rehabilitation, you must make nine monthly payments within 20 days of the due date for 10 consecutive months. For Perkins Loans, the requirement is nine payments for nine consecutive months. You can only use the loan rehabilitation program once. Once your loans are taken out of default, you can qualify for helpful repayment programs. In addition, records of the default are removed from your credit report.

Your second option is to consolidate your defaulted loans into a Direct Consolidation Loan. This will consolidate your loans into a single loan with a fixed interest rate. By consolidating your loans, you can exit default within a period of weeks instead of months. However, you may pay more over the life of your loan if your prior interest rate was lower.