What happens if you default on a student loan?

Defaulting on a student loan can have serious financial and legal consequences including damaged credit, wage garnishment, tax refund withholding, lawsuits, and loss of eligibility for federal financial aid. 

The consequences of default depend on whether you have federal or private loans. 

Through Sept. 30, 2024, the U.S. Department of Education has implemented an “on-ramp” period so borrowers can prepare for repayment. During this time late or missed payments will not be reported to credit bureaus and your credit score will not be affected.

This is how loan defaults generally affect you depending on whether it is a federal or private loan:

Federal loan default

Federal student loan payments were suspended for three and a half years due to the COVID-19 pandemic. During this time interest rates were at 0% and defaulted loans did not go to collections. 

However, interest began to accumulate again from Sept.1, 2023, and repayment began on Oct. 1, 2023. 

This is what normally happens if you make a late payment or miss payments:

1. If you miss payments by even one day, your payments are considered delinquent and you may be charged late fees. 
2. Your loan servicer will report the missed payments if you delay making payments for more than 90 days (three months) to all three major credit bureaus – Experian®, Equifax®, and TransUnion®. This may hurt your credit score.
3. If you delay or miss a payment more than 270 days (nine months), your loan goes into default and your debt may go into collections.

Under normal circumstances this is what happens if you default on your federal loans:

1. You may not receive any federal benefits like repayment plans, forbearance, and deferment. 
2. You may not get additional federal student aid or your tax refunds or a portion of your income may be withheld to pay back the defaulted loan. 
3. You may be sued by the loan servicer for failing to pay back the loans. 

However, through the end of September 2024 borrowers who miss payments will not face these consequences. Considering the ongoing effects of the pandemic and overall economic conditions, the federal government recognized that it might be difficult for many to immediately restart payments. Especially those expecting President Joe Biden’s loan forgiveness plan to come through. 

During this year-long “on-ramp” period, defaulted loans will not be reported to the credit bureaus, cause wage garnishment, or go into collections. But, interest rates will continue to accumulate. You don’t need to apply or separately sign up for the on-ramp. It is automatically applicable to everyone.

This period is not a continuation of the pandemic pause on loan interest rates. These are the benefits of the on-ramp:

• Your missed or defaulted payments will not be considered delinquent or reported to the credit bureaus.
• Your credit score will not be affected negatively.

There are drawbacks to this as well: 

• Interest will continue to accumulate.
• The missed payments will still be due after 12 months.
• There won’t be any progress toward qualifying payments for loan forgiveness programs like income-driven repayments or Public Service Loan Forgiveness.

Experts suggest that the on-ramp period can help if you have just graduated from college and haven’t found a job yet. The on-ramp will serve as a safety net to help you get your finances in order and begin paying back your loan as soon as you can instead of waiting the whole 12 months. The on-ramp may also help others who have high-interest loans other than student loans to pay off.

Private loans default

With private loans, you don’t get the benefit of a nine-month waiting period before your loan default is reported to the credit bureaus. Every private loan servicer will have their terms and conditions so the consequences of defaulting on a private loan will vary. 

These are some of the consequences if you don’t pay your private student loans:

• Your debt may be sent to a collections agency.
• Your late or missed payment may be reported to the credit bureaus.
• You may be sued and your home may also be seized by the loan servicer.