You might be surprised to learn that your credit report isn’t the easiest place to find defaulted student loan debt. It’s actually the Federal Student Aid website, studentaid.gov. That site lists all the federal student loans you’ve ever borrowed, including your defaulted loans. It also tells you the current loan balance, interest rate, and — most important — the contact information for the loan servicer that currently holds your debt.
Private student loans in default are a lot harder to locate. There’s no central database for defaulted private loans. If the loans have fallen off your credit report, your options are limited: You can either call the lender to learn which debt collector it sold the loans to or wait for the collection agency to contact you. The danger with waiting is that the next time you hear from someone about the loans may be when a sheriff is serving you with a lawsuit from the loan holder to go to court.
Once you find your defaulted student loans, you’ll want to deal with them quickly to avoid wage garnishment, tax refund offset, and so on. Lenders can’t garnish your wages or take your Social Security payments for private loans — but they can take you to court. If they do and get a judgment against you, they can garnish your wages, put a lien on your home, and seize the money in your bank account. Read more about the consequences of defaulting on student loans.There are three ways to recover from default on a federal loan: repayment, consolidation, and loan rehabilitation. Private lenders rarely offer solutions that will return your loans to good standing. Once you default, you can recover from default by refinancing into a new loan, negotiating a settlement, or filing bankruptcy and proving undue hardship. Read more about private student loan bankruptcy.
Although some of these options remove the default status from your credit report, the effect on your credit score will be about the same. The key to improving your score quickly is to choose an option that gets you out of default faster. For example, you must make nine monthly payments before finishing the loan rehabilitation program. But a Direct Consolidation Loan will bring your account current in less than three months.
Note: No matter your choice, the late payments will remain on your credit history for about seven years. The only way to remove those sooner is if the information is inaccurate.
Since the start of the coronavirus pandemic, the White House has frozen student loan payments and interest accumulation on federal loans. It has also paused collections on defaulted loans owned by the U.S. Department of Education and commercially held Federal Family Education Loans.
In April, Education Secretary Miguel Cardona announced that the department would help millions of borrowers in delinquency and default get back on track by restoring their federal student loans to good standing. He added that the department would use the rest of the forbearance to “continue our preparations to give borrowers a fresh start and to ensure that all borrowers have access to repayment plans that meet their financial situations and needs.”
Education Department officials said that other details about the plan would be posted on studentaid.gov, but there have been no updates since that announcement was made. There’s currently no timetable for when borrowers will be pulled out of default and how the planned clean slate will work, leaving many questions: Will collection fees be lifted? Will borrowers receive credit towards loan forgiveness for their time in default? Which loan servicer will their accounts be moved to?
Here are three things you can do to avoid defaulting again:
Request a more affordable payment. Consider an income-driven repayment plan, which ties your monthly payment amount to a portion of your discretionary income and forgives your remaining balance after 20-25 years of on-time payments. If you have FFEL Loans or Perkins Loans, consolidating into the Direct Loan Program can improve your repayment options and eligibility for sweeping student loan forgiveness. Read more about President Biden’s $10,000 student loan forgiveness program.
Enroll in autopay. Sign up for automatic payments once your student loan bills resume, so your payment is taken out of your bank account by the due date without having to do anything. Read more about when student loan payments resume in 2022.
Consider another pause. If you’re unemployed or need a short-term break from paying, enroll in an IDR plan for your federal loans. Ask your servicer about a deferment or forbearance if you have private loans.