Q: When does federal student loan default begin?

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You default on your federal student loans after you miss 270 days of required monthly payments.

Until you miss your 9th monthly payment, your federal loans are delinquent but not yet in default.

Your loan servicer does not report your delinquency to the credit bureaus right away.

They wait until you miss 3 months of student loan payments. Only then do they report that your account is 90 days late.

Click here to read What Happens if You Miss a Student Loan Payment?

Due to the continued coronavirus pandemic, Pres. Biden has extended the federal student loan freeze through September 2021. Borrowers whose loans are held by the U.S. Department of Education are covered by this freeze. Borrowers with a different type of loan in good standing (loans made under the Perkins Loan Program and FFEL Loan Program) may not be covered. Check with your loan servicer to find out if your FFEL Loans are in deferment/forbearance.

What happens if you default on a federal student loan?

When you default on a federal student loan, the federal government moves your loan from your loan servicer to the Debt Management Collections System/Default Resolution Group.

From there, your defaulted student loan will be sent either to a private collection agency or will remain with the Debt Management team.

The process is slightly different for student loan borrowers with Federal Family Education Loans. When FFEL Loan borrowers default, their loans are sent to the loan holder (MOHELA, ECMC, Trellis, etc.)

What are the consequences of defaulting on a federal student loan?

The consequences of defaulting on a federal student loan include:

  • wage garnishment
  • tax refund/Treasury offset
  • Social Security benefit offset
  • damage to your credit score by adding late payments and a default status to your credit report
  • collection costs being added to your overall student loan debt

Other consequences of default are that you lose eligibility for student loan forgiveness programs, income-driven repayment plans, and access to new federal student aid.

Finally, you lose eligibility to the FHA Mortgage Program.

You'll remain ineligible for an FHA loan until your name is removed from the CAIVRS list.

Click here to learn How to Get a CAIVRS Waiver for a Student Loan?

Don't worry about jail. You won't go to jail if you fail to pay your student loans.

Private student loans can't garnish your wages immediately after you have late payments/default. They first have to take you to court. Only when the private lender gets a judgment against you can they garnish your wages.

How do I get federal student loans out of default?

You have 3 options to get federal student loans out of default:

  1. negotiate a federal student loan settlement
  2. enter into the loan rehabilitation program
  3. apply for a Direct Consolidation Loan

Most federal student loan borrowers can't afford a settlement. The cost to settle is typically too high.

The Department of Education usually is willing to waive the collection fees and reduce the loan balance by 10%.

So if you owe $110 thousand. And $10 thousand is collection fees. Your settlement will be for $90 thousand.

Plus, you have to pay the full amount of the settlement in 90 days. There are no payment plans.

Because settlement usually isn't an option, most borrowers choose between the Loan Rehabilitation Program and applying for a Direct Consolidation Loan.

Which one should you choose?

Read these resources to help make your decision:

How to get federal student loan collection fees waived

After you default, the Department of Education will add collection fees to your account.

Those collection fees can legally be somewhere between 17-25% of your loan balance, principal, interest, and fees.

For the past few years, the Department of Education has agreed to waive those collection fees if you complete the Loan Rehabilitation Program.

How do you know that your collections costs will be waived?

Your right to have the fees waived is included in the Loan Rehabilitation Agreement Letter you sign.

You have a contractual, legal right to have the fees waived.

Click here to read How to Get Federal Student Loan Collection Fees Waived

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