What happens if I don’t pay my student loans?

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 serious and can affect many areas of your life. You may experience consequences including:

• Wage bill: The Department of Education can garnish up to 15 percent of your disposable wages. Unlike private collectors, the Department of Education does not need a judgment to garnish your income.
• your balance increases: Your remaining balance is due immediately 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 it to all three credit bureaus if your loans remain delinquent for too long. The three credit bureaus are also reported after the default. This can significantly lower your credit score. Having a low credit score can make it hard to get a job, home, or other lines of credit.
• You lose eligibility for financial aid: You are not eligible for federal financing while your loans are in default. Defaulting on your loans can cause problems if you plan to return to school.
• Lose eligibility for payment plans: One of the main benefits of most federal student loans is that you can take advantage of income-based repayment plans. You lose these options after you default on your student loans. Additionally, you no longer qualify for hardship deferments or forbearances.

Can I get my student loans out of default?

Depending on your situation, your federal student loans may not be in default. Borrowers generally have two options available: the Department of Education’s loan rehabilitation program or converting their loans to a Direct Consolidation Loan. Both options may have advantages and disadvantages depending 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 over nine consecutive months. You can only use the loan rehabilitation program once. Once your loans are out of default, you may qualify for helpful repayment programs. Also, records of the default are removed from your credit report.

Your second option is to consolidate your delinquent 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 get out of default in weeks instead of months. However, you can pay more over the life of your loan if your previous interest rate was lower.