Student Loan Default Consequences: Credit Damage, Collections, and Government Powers

Updated on November 13, 2025

Defaulting on a student loan does three things right away: it increases your balance, damages your credit for years, and—if it’s a federal loan—gives the government extraordinary power to collect from you.

Once a loan defaults, the entire balance becomes due, collection fees are added, and your credit report reflects a major derogatory mark that can last up to seven years. Until the default is resolved, you lose access to deferment, forbearance, and forgiveness programs.

Immediate Financial & Credit Fallout

Default hits in two ways—your credit report and your loan balance. Both worsen almost immediately.

Credit Score Damage

A student loan default is treated by credit models as a major derogatory event. Payment history makes up 35% of your FICO score, so missing payments quickly drives large point losses.

Recent TransUnion data show borrowers lose about 63 points on average after default, with nearly 70% dropping 50 points or more. Those with top credit suffer the steepest declines — super-prime borrowers can lose up to 175 points after a single default.

The record stays on your credit report for seven years under the Fair Credit Reporting Act, unless you complete federal loan rehabilitation, which removes the default notation early.

Collection Costs Added

Once a loan defaults, collection fees are immediately added.

Federal loans: Up to 25% of the balance is added as a collection charge if you pay in full after default. During repayment, as much as 20% of each payment can be siphoned off for fees before touching principal or interest.
Rehabilitation or consolidation: The Department of Education caps fees at 18.5% of the balance when you resolve the default this way.
Private loans: Fee levels vary by contract, but 20–25% is common, often with additional legal costs once a lawsuit is filed.

Loan Acceleration and Collections

Once a loan defaults, the entire balance becomes due immediately — a process called loan acceleration. The account is no longer managed by your original servicer.

Federal loans are transferred to the Department of Education’s Default Resolution Group or one of its contracted collectors. You’ll deal directly with them until you consolidate, rehabilitate, or pay the debt in full.
Private loans are typically sent to a collection agency or sold to a debt buyer. The lender can also file a lawsuit to recover the balance, adding legal fees and court costs.

Acceleration is the point where normal repayment ends and full-scale collection begins — interest, fees, and enforcement all grow from here.

Government Collection Powers

When a federal student loan defaults, the government doesn’t need a court order to collect. Federal law gives the Department of Education and the U.S. Treasury broad powers to recover the debt directly from your income and benefits. These methods operate independently of your servicer and continue until the default is resolved or the balance is paid in full.

Wage Garnishment

Through administrative wage garnishment, the Department of Education can order your employer to withhold up to 15% of your disposable income. No lawsuit is required. You’ll receive a 30-day notice before garnishment begins and the right to request a hearing or propose a repayment plan.

Garnishment stops once you consolidate, rehabilitate, or fully repay the loan, but until then, the deduction is automatic each pay period.

Tax Refund Offset

If you’re due a federal tax refund, it can be seized under the Treasury Offset Program. The government applies your refund to the defaulted loan balance before you ever receive it.

Offsets continue annually until the default is cleared. Filing jointly doesn’t protect your spouse’s portion of the refund unless they file an injured-spouse claim, which can take several months to process.

Social Security and Disability Benefit Offset

The government can also withhold a portion of Social Security retirement or disability payments from defaulted borrowers who are 62 or older or receiving SSDI. The Treasury Department can take up to 15% of monthly benefits—but must leave you with at least $750 per month in protected income. Offsets stop once you enter rehabilitation, consolidation, or qualify for a discharge due to disability or death.

Long-Term Restrictions and Lost Benefits

Default locks you out of every major federal borrower protection until it’s resolved. You can’t use deferment, forbearance, or income-driven repayment, and you lose eligibility for new federal aid.

For forgiveness programs, the clock stops completely — months in default don’t count toward PSLF or income-driven forgiveness. Once you rehabilitate or consolidate, eligibility resumes, but lost time can’t be recovered.

In some professions, default can also complicate professional licensing or federal security clearance renewals, but those issues are secondary to the core problem: you lose access to every form of federal relief until you fix the default.

Legal and Private Loan Consequences

Private loan defaults don’t trigger automatic garnishment or government offsets — but they do open the door to lawsuits. After about 90 days past due, many lenders file suit to recover the full balance. If you don’t respond, they win a default judgment, which allows wage garnishment or bank levies under state law.

Judgments also appear on your credit report, adding another derogatory mark that can stay for seven years. Each state has a statute of limitations—usually three to six years—limiting how long a lender can sue, but a partial payment or signed agreement can restart that clock.

How to Escape Default

Default isn’t permanent. You can bring a loan back into good standing — but the path depends on whether it’s federal or private.

Federal Loans

You have two main ways out:

Rehabilitation: Make nine agreed payments within ten months. Once complete, the default is erased from your credit report, and collection stops.
Consolidation: Combine the defaulted loan into a new Direct Consolidation Loan and choose an income-driven repayment plan. This ends the default faster but keeps the old default record on your credit for seven years.

Both restore eligibility for deferment, forbearance, and forgiveness programs once completed.

Private Loans

Private lenders don’t offer rehabilitation. Your options are to negotiate a settlement—often for 30–60% of the balance—or set up a repayment plan with the collector. If the loan has been charged off, always get any deal in writing before paying.