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˳
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