Defaulting on student loans is a fairly common occurrence and it can have dire consequences. For more than three years, COVID-19 emergency relief measures suspended student loan repayments and protected federal student loan borrowers from the threat of default and its negative impacts, such as wage garnishment and withheld tax refunds.

However, student loan payments resumed Oct. 1, 2023, although borrowers who struggle to make payments will be spared from the threat of default or delinquency until September 2024.

Impact of Student Loan Legislation

During the COVID-19 pandemic, the government suspended student loan repayments and set interest rates to 0%. Student loan interest began to accrue again starting Sept. 1, 2023, with student loan repayments resuming the following month.

The Biden administration had attempted to provide direct relief in the form of forgiveness to student loan borrowers, announcing in August 2022 that Pell Grant recipients could claim up to $20,000 in relief while other borrowers could receive up to $10,000 in forgiveness. However, the Supreme Court, in a June 2023 decision, ruled the administration lacked the proper authority to do so.

The White House subsequently announced an income-driven assistance program called the Saving on a Valuable Education (SAVE) plan, which it said could benefit 20 million borrowers. The plan would reduce undergraduate loan repayments from 10% to 5% of discretionary income. Borrowers below certain income thresholds would see their monthly payments cut to $0.

In addition, during a 12-month "on-ramp" that started in October 2023, borrowers who have trouble making payments will not be considered delinquent, reported to credit bureaus, placed into default, or referred to debt collectors.

What Happens If You Default on Federal Student Loans?

An array of consequences can come into play if you let your federal student loans go into default by failing to make scheduled loan payments for at least 270 days. These consequences are outlined on the Federal Student Aid website.

• Acceleration: The entire unpaid balance of your loan plus all interest you owe becomes immediately due when your federal student loans are in default. This process is known as acceleration.
• Federal benefits: Defaulting on federal student loans means losing access to federal protections such as deferment and forbearance.
• Flexibility: Defaulting on federal student loans means giving up the ability to choose your own payment plan or to switch student loan repayment plans. You also lose access to income-driven repayment plans.
• Federal student aid: You are no longer eligible for federal student aid after your loans go into default.
• Credit score: Late payments on federal student loans can be reported to the three major credit bureaus 90 days after you're late. This is well before you're officially in default. It damages your credit score and can make it difficult for you to get a credit card, car loan, or mortgage.
• Treasury offset: Your tax refunds and federal benefit payments can be garnished or withheld to repay overdue student loan balances through a process called treasury offset.
• Wage garnishment: The federal government can garnish your wages in order to help cover your student loan payments.
• Legal problems: Your loan servicer may take you to court and this can lead to you having to pay court fees and other legal expenses in addition to what you owe on the loan.
• Other issues: The school you attended may withhold your transcript, which can make it difficult for you to be admitted to another institution of higher education. It's also possible that you could be barred from purchasing or selling real estate and other assets.

Federal Student Aid recommends reaching out to your student loan servicer if you're having trouble making payments or if you want to find out how you can get your student loans out of default. Loan servicers are required to notify you of options such as forbearance or income-based repayment plans.

What Happens If You Default on Private Student Loans?

Borrowers with private student loans face a different set of rules when it comes to late payments. They must follow the rules and guidelines set by their student loan provider, and the consequences of missing loan payments can vary from lender to lender. 

Your student loans are considered in default if you miss a payment with a private student loan lender and it's been 90 days or longer. According to the Consumer Financial Protection Bureau (CFPB), you can also default on private student loans "if you declare bankruptcy, default on another loan, or die."

As with federal student loans, you may also be sued by your lender if you fail to repay the money you borrowed to fund your education. This can mean being on the hook for court costs and other legal fees in addition to the principal of your loan balance and all interest that has accrued. The CFPB says that you should reach out to your loan provider right away if you believe you may have trouble making payments on private student loans.

Doing so can help you determine whether switching repayment plans is an option, or if your private student loan servicer offers a temporary forbearance or unemployment protection program.

The Bottom Line

The impact of defaulting on a student loan can be devastating and it can take years to repair the damage to your credit score and your finances. Your best bet is to take action as soon as possible if you're worried about missing payments or you're suffering financial hardship of any kind, even if you haven't missed a student loan payment yet.

Reach out to your loan issuer and talk over your concerns so you can find out what options are available to help you avoid default in the short term. You may be able to get back on track and avoid the worst consequences of letting student loan payments lapse with some smart planning and enough time on your side.