Student Loan Default: Everything You Need to Know

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Sometimes when the weight of student loan debt becomes overwhelming, it’s almost easier to pretend it doesn’t exist.

And while that can certainly feel better momentarily, pretending for too long could lead to student loan default. And that leads to even more debt and a damaged credit score.

If you’re facing student loan default, you’re not alone. According to Time, 8 million borrowers (or 1 out of 6) are in default on their federal student loans. But you have options if you default — and there are precautions you can take to stop it from happening in the first place.

Here’s what happens when you default on a student loan, what to do about it, and how to prevent defaulting on student loans if you’re on the brink.

Signs you’re at risk of defaulting on student loans

Financial hardship doesn’t always enter with a bang. Often, we think we’re doing okay, but the financial house we’re building is just a house of cards. One swift breeze and the entire thing could tumble down.

There are ways to see it coming, though. The risk of defaulting on student loans increases if one or more of the following applies to you:

  • Your monthly budget is so tight that one unexpected expense can derail the whole thing.
  • Your interest rate or monthly payment has increased, but you were already barely able to make your payments.
  • You’re finding that it’s becoming harder and harder to make your monthly payments in full and on time.
  • You’ve already missed a few payments.
  • Your co-signer has declared bankruptcy or died — which can lead to automatic default.

If you’re experiencing any of these, don’t panic. There are steps you can take now to regain control of your loans.

How to prevent a default on student loans

If you think you’re careening toward student loan default, you can still take some of the steps below to swerve away in time. Your options will vary based on the type of loans you have.

Make a payment

If you’re already late on a payment, it’s not too late to salvage the situation. Although student loans are considered to be delinquent as soon as you miss a payment, federal student loans don’t officially go into default until they’re unpaid for 270 days.

Private student loans, on the other hand, don’t have quite this much of a buffer. Since private lenders treat them similarly to other loans, private student loans can go into default as soon as they go unpaid.

Either way, if you have the money to make a payment, make it right now. Federal lenders report student loan delinquency after 90 days. Private lenders can report it at any time.

And if a default hits your credit report, the wheels can start falling off the bus. It’s hard enough to face the financial consequences of student loan default — but the damage it can do to your credit score can be just as far-reaching (more on that below).

Apply for deferment or forbearance

If you don’t have the money for a payment, you might be able to suspend your payments through deferment or forbearance.

Both of these options halt your payments for a limited time, but with forbearance, interest will always accrue during that period. (You can use our student loan deferment calculator to see the impact this will have on your loans.) Interest might not accrue during deferment if you have subsidized loans or Perkins loans.

As for which option you should pick, a private lender might only offer forbearance. For subsidized federal student loans, deferring if you’re eligible is ideal, since you can avoid accruing interest during that time.

If you qualify for economic hardship deferment or unemployment deferment, you can utilize them for up to three years.

As for forbearance on your federal loans, you can be eligible for mandatory forbearance if you have Direct, FFEL, or Perkins loans, and if your monthly payment is at least 20 percent of your monthly gross income. This is available for up to three years. You can also request general forbearance for financial difficulties, but in this case, approval is at the discretion of your lender.

Apply for an income-driven repayment plan

There’s no question that deferment and forbearance are effective options if you’re on the verge of student loan default. But if you think this is an issue you’ll have for more than a year, then it might be time to look at income-driven repayment plans.

Income-driven repayment plans are only available for federal student loans (except for loans given to parents), and they reduce your monthly payment to a certain percentage of your income. These plans also qualify you for student loan forgiveness after a specified amount of payments, which vary by plan.

If you decide to apply for an income-driven repayment plan, keep this in mind:

  • You’ll have to reapply each year. And you’ll want to give yourself enough time to gather paperwork and submit it before the application is due.
  • Any amount of student loan debt forgiven under these plans might be considered taxable income.

So what are the plans, and which ones could work for you? It all depends on the types of loans you have and when they were disbursed. The income-driven repayment plans are as follows:

Here’s a guide to help you find the repayment plans you may qualify for:

student loan default

You can find more information and apply for one of these plans via Federal Student Aid’s website. And you can see what each of these might save you with our following calculators:

For private loans, talk to your lender

It’s unfortunate that private student loans don’t come with income-driven repayment plans, but that doesn’t mean private student loan borrowers are without options.

Talk to your lender to see what kind of financial hardship options they offer. It’s likely that forbearance will be one of them, but they might also offer other plans or options that aren’t widely advertised. You lose nothing by having the conversation.

Consolidate your loans

Let’s say things aren’t that serious yet, but you feel that now is the time to make a change. If you have federal student loans with various servicers, consolidation could help.

Federal student loans can be consolidated via a Direct Consolidation Loan. Not only does this loan group all your monthly payments in one, it will also bring you down to only one (preferably lower) fixed interest rate. And it will make you eligible for income-driven repayment plans which you might not have qualified for before.

This loan can also extend your time to repay for up to 30 years, which could lower your monthly student loan payment. While incredibly helpful when you’re struggling to make payments, it’s worth noting that staying in debt longer can cost you more in the end. But for those trying to make ends meet right now, this can be a game-changer.

Consolidation isn’t without its downsides. If you’ve already made headway on payments made under income-driven repayment plans so you can achieve student loan forgiveness (including Public Service Loan Forgiveness), this loan will remove the progress you’ve made so far. And if you currently take advantage of things like interest-rate discounts or rebates on your principal balance, you could lose those benefits.

If you think this is the right move for you, you can fill out the Federal Direct Consolidation Loan application.

Refinance your loans

Finally, an option for both federal and private loans: student loan refinancing.

Refinancing your student loans is similar to consolidating them. You would combine all your loans (or those you choose to include) into one new loan. You can even refinance federal and private student loans together. Ideally, the new loan will come with a lower interest rate than what you’re paying now. This can both simplify your monthly repayments and potentially save you money on interest or shrink the size of your payment.

However, refinancing federal student loans involves buying them out with private student loans. And that means you’ll lose access to federal forbearance and deferment, income-driven repayment plans, and federal student loan forgiveness.

That said, it might be worth collecting refinance offers to see if it makes sense for you. You can do this without taking a hit to your credit — most lenders only start with a soft credit pull, which doesn’t affect your credit score.

After you’ve collected your offers, use this refinancing calculator to compare your current payoff trajectory with that of the new loans for which you could qualify.

What happens when you default on a student loan

Now that you know some of the ways to avoid defaulting on student loans, let’s get into what happens if you do default.

There are a variety of consequences, and their occurrence depends on how long you’ve been in default.

  • You’ll lose eligibility for federal repayment flexibility.
  • You’ll become ineligible for student loan repayment assistance programs (LRAPs).
  • Your credit score will take a hit that will worsen as the student loan default does.
  • You could be charged large, egregious fees.
  • You could be sued for collections.
  • Your wages could be garnished, your tax refunds could be withheld (for multiple years if necessary), and even your retirement benefits could be at risk.
  • You could lose your professional license.
  • Any co-signers involved will experience damage to their credit scores.

As you can see, defaulting on student loans is not something to be taken lightly. If you’re feeling overwhelmed by your loans, ignoring them will only worsen the situation.

Remember, unlike other types of debt, student loans are notoriously difficult to discharge through bankruptcy. If you’re in student loan default, regain your control of the situation now before things escalate beyond your reach.

What to do if you’re in default on student loans

At this point, you know enough about what happens when you default on a student loan, so let’s talk about how to fix it. First, here’s what to do if you default on student loans that are federal.

Federal Student Aid lists three options for getting out of federal student loan default:

  • Enter loan rehabilitation.
  • Consolidate your loans.
  • Repay your loans in full.

It’s probably safe to say that most people won’t be able to achieve the third option, so let’s discuss the first two.

The Direct Consolidation Loan, as mentioned above, is one choice for exiting default, but if you go this way, you must first either agree to sign up for an income-driven repayment plan or make three consecutive, on-time, full payments on your loan. Even if you do this, the record of your student loan default and the late payments will remain on your credit report for multiple years.

Your other option is student loan rehabilitation. With student loan rehabilitation, you would contact your servicer and agree in writing to make nine monthly payments within 20 days of your due date for 10 consecutive months.

But don’t worry, the payments don’t have to be the full monthly amount you were already having trouble making. Instead, it will be 15 percent of your annual discretionary income divided by 12. The payment can be as low as $5 per month.

If you choose to rehabilitate your loan, then your credit history will no longer show the default, but it will show the late payments reported by your servicer.

Unfortunately, there are no such options for most private student loans in default, according to Student Loan Borrower Assistance. If your loans are private, the best thing to do is contact your lender and ask them what you can do.

If there aren’t many options, consider refinancing your private student loans or trying to settle them with your lender if you have a lump sum of money you can afford to pay at once.

Student loan default: It’s not just you

Student loan default isn’t easy to navigate — but it’s also not something to beat yourself up over. If you’re in default on student loans, know that you’re not alone.

Don’t forget how typical student loan default is — and nowadays this is especially true if you attend a for-profit or community college.

Data from a report done by The Brookings Institution in 2015 compared what they consider to be traditional and nontraditional students who left school in 2011. They found that 21 percent of those who attended for-profit college and community colleges (“non-traditional”)  were in default on student loans within two years of leaving school. That’s 13 percent more than those who graduated from four-year colleges and universities the same year.

So why the higher rate of student loan default for non-traditional students? The report showed that this cohort was less likely to finish their degrees and also less likely to find work after school. That can make repayment of student debt a tough challenge.

But even if you were a traditional student, you could be facing a similar conundrum. And those who found gainful employment could be earning far less than they need to afford their student loan payments. Although it’s a difficult situation for all who encounter it, you can remedy your student loan default if you follow the steps above.

And if you’re feeling overwhelmed, start here. You’ve already done the most important step of doing your research. Now all you have to do is consider which of the options above could work for you, and then contact your lender or servicer to get the ball rolling. After that, it’s just one day at a time.

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1 Important Disclosures for Earnest.

Earnest Disclosures

To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.

Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.

Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.

The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at hello@earnest.com, or call 888-601-2801 for more information on ourstudent loan refinance product.

© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.


2 Important Disclosures for Laurel Road.

Laurel Road Disclosures

APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.

Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.

However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.


3 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance:
    Fixed rates from 3.899% APR to 7.979% APR (with AutoPay). Variable rates from 2.470% APR to 6.990% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.470% APR assumes current 1 month LIBOR rate of 2.30% plus 0.91% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score.
  2. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

4 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.


5 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.

All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.


6 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Education Refinance Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of November 1, 2018, the one-month LIBOR rate is 2.29%. Variable interest rates range from 2.79%-8.39% (2.79%-8.39% APR) and will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a cosigner. Fixed interest rates range from 3.75%-8.69% (3.75%-8.69% APR) based on applicable terms, level of degree earned and presence of a cosigner. Lowest rates shown require application with a cosigner, are for eligible, creditworthy applicants with a graduate level degree, require a 5-year repayment term and include our Loyalty discount and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty and Automatic Payment Discount disclosures. The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of their loan.
  2. Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans and replace those with the benefits of the Education Refinance Loan. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision at http://www.citizensbank.com/EdRefinance, including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
  3. Citizens Bank Education Refinance Loan Eligibility: Eligible applicants may not be currently enrolled. Applicants with an Associate’s degree or with no degree must have made at least 12 qualifying payments after leaving school. Qualifying payments are the most recent on time and consecutive payments of principal and interest on the loans being refinanced. Primary borrowers must be a U.S. citizen, permanent resident or resident alien with a valid U.S. Social Security Number residing in the United States. Resident aliens must apply with a cosigner who is a U.S. citizen or permanent resident. The cosigner (if applicable) must be a U.S. citizen or permanent resident with a valid U.S. Social Security Number residing in the United States. For applicants who have not attained the age of majority in their state of residence, a cosigner will be required. Citizens Bank reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Education Refinance Loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, certification of borrower’s student loan amount(s) and highest degree earned.
  4. Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  5. Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
  6. Co-signer Release: Borrowers may apply for co-signer release after making 36 consecutive on-time payments of principal and interest. For the purpose of the application for co-signer release, on-time payments are defined as payments received within 15 days of the due date. Interest only payments do not qualify. The borrower must meet certain credit and eligibility guidelines when applying for the co-signer release. Borrowers must complete an application for release and provide income verification documents as part of the review. Borrowers who use deferment or forbearance will need to make 36 consecutive on-time payments after reentering repayment to qualify for release. The borrower applying for co-signer release must be a U.S. citizen or permanent resident. If an application for co-signer release is denied, the borrower may not reapply for co-signer release until at least one year from the date the application for co-signer release was received. Terms and conditions apply.

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.