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While on the work grind at the office, you get an email from the HR department, inviting you down to pay them a visit. Uh-oh. What could possibly be up? You’re a rock star on the job, so you cannot imagine what the trouble could be.

The good news: you’re not getting fired. The bad news: they tell you that part of your wages are going to be garnished in order to pay back your outstanding school loans.

What Is Student Loan Wage Garnishment?

Student loan wage garnishment is a tough thing to face; what makes it doubly troublesome is the official letter from the U.S. Department of Education that notifies your employer that a percentage of your paycheck will now go directly to paying back your outstanding student loan balances.

This may be something that would be a big enough bummer when you’re the only one who knows about it. When your employer is let in on the secret, and ordered by the government to reconfigure your paycheck, the awkwardness knows no bounds.

Student loan wage garnishment does not make it easy for you or your employer . Your company’s payroll department generally executes (and sometimes calculates) the student loan garnishment amount, and forwards the payments to the correct agency or creditor. In some cases, your employer can be held liable for the full amount or a portion thereof for failure to comply with the garnishment. This can include interest, court fees, and legal costs.

If it’s any consolation, you would not be alone in this situation. Let’s start with the macro: according to
CNBC , more than one million people default on their student loans each year. By the year 2023, nearly 40% of borrowers are expected to default on their student loans. Outstanding debt in the U.S. has tripled over the last decade and now exceeds $1.5 trillion. That number far exceeds the traditional debt of autos and credit cards.

Now for the micro: according to a study by the ADP Research Institute , 7.2% of employees had their wages garnished in 2013 (the latest research we could find on this). Of that total, 2.9% of those garnishments were from student loan and court-ordered consumer debt garnishment.

Defaulting on your student loan is not ideal. We’re going to share some details on federal student loan garnishment, and how you can avoid defaulting on your loans.


💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

How Does Federal Student Loan Garnishment Work

Your wages can’t be garnished out of nowhere. It starts with your loan becoming delinquent, which happens the first day after you miss a payment. Your loan will remain delinquent until you pay back everything you owe.

If you are more than 90 days delinquent on your payment, your loan servicer reports the missed payments to the three national credit bureaus (Equifax, Experian, and TransUnion). This will negatively affect your credit, as payment history makes up 35% of your score.

Eventually, if you still fail to repay your debt, the government may resort to garnishing your wages and/or withholding your tax refund, which they can do without a court order. Legally, they can garnish up to 15% of your disposable pay. Disposable income is calculated by taking your gross income, and then subtracting your tax obligations and other withholdings such as Social Security, Medicare, state tax, city/local tax, health insurance premiums, and involuntary retirement or pension plans.

The good news is that there is a temporary exception to this process. To help financially vulnerable borrowers transition to making their student loan payments after an automatic, three-year pause that ended in October, the Biden administration implemented an “on-ramp” period. From Oct. 1, 2023 through Sept. 30, 2024, borrowers who miss payments will not be considered delinquent or in default, have missed payments reported to the credit bureaus, or have their loans referred to collections agencies.

Ways To Help Prevent Your Student Loan From Becoming Delinquent

If you are concerned about wage garnishment for your federal student loans, there are proactive steps you can take to keep your account from becoming delinquent in the first place:

Scheduling automatic payments. You can have the monthly obligation automatically and electronically deducted from your checking or savings account.

Building an emergency savings fund. You can save at least six months of backup funds that you can use specifically to make your monthly payments. This may come in handy should you be without income for a time.

Ways To Help Prevent Your Student Loans From Going Into Default

Based on your financial circumstances, there are a few options available that may allow you to make your student loan payments more affordable or even put them on a temporary hold:

Income-Driven Repayment (IDR) Plans: With these plans, your student loan payments are adjusted based on your discretionary income. Depending on the plan you choose, the government typically extends your repayment terms and readjusts your monthly payment, and may eventually forgive the balance of your loan. The newest IDR plan, the SAVE Plan, will provide the lowest monthly payments once it’s fully implemented in July 2024.

Forbearance or Deferment: If making payments is becoming or has become nearly impossible, you can ask your lender to defer your payments or request forbearance. If they agree and you qualify, you can delay your payments and avoid default.

Student Loan Refinancing vs Consolidation

If student loan wage garnishment is the nightmare that comes true, here are two options that may be able to stop it: consolidating or refinancing your student loans. First, know the difference between the two (and it’s a pretty big one):

When you refinance student loans, you’re actually paying off your existing loans with a new loan from a private lender. In this process, you can possibly reduce your payments and make them more affordable. (You may pay more interest over the life of the loan if you refinance with an extended term.) Or you may be able to lower your interest rate. However, you also will lose out on certain benefits that come with federal student loans, like deferment and forbearance, and lose your eligibility for all other federal student loan programs.

When you consolidate your federal student loans with the federal government, you essentially “bind” them all together into one, big loan. Sounds like a plan, but there can be a few downsides; this could result in you paying more in interest over the life of your new, consolidated loan because the interest rate on your consolidated federal loan will be the weighted average of all your loans, rounded to the nearest eighth of 1%. You can also only consolidate your federal loans under a Direct Consolidation Loan, which has its own requirements if you’re already in default, and isn’t available for private student loans.

Consolidating a Defaulted Loan

According to the U.S. Department of Education, if you want to consolidate a defaulted loan, you must make “satisfactory repayment arrangements” on the student loan with your current loan servicer before you consolidate.

If you want to consolidate a defaulted loan that is being collected through garnishment of your wages, or that is being collected in accordance with a court order after a judgment was obtained against you, you may only do so if the garnishment order has been lifted or the judgment has been vacated.

Refinancing Your Student Loans

You may be able to combine your private and federal loans into one brand-new, private refinanced loan.

You may be a good candidate for student loan refinancing if you have a steady income, a consistent history of on-time debt payments, and you don’t have need for federal student loan benefits—among other important personal financial factors. (When you refinance your federal loans with a private lender, you can no longer access any federal loan benefits.)

A lender will most likely offer you a few choices for your refinanced student loan: fixed and variable interest rates, as well as a variety of repayment terms (this is often based on your credit history and current financial situation). If you qualify for refinancing, your new loan should (hopefully) come with a new interest rate or a new loan term that can lower your monthly payments.(You may pay more interest over the life of the loan if you refinance with an extended term.)

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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If you dread your student loan payments each month because you aren’t sure whether you can afford to cover the minimum payment, know that there are solutions to make student loans more manageable. One option is hiring a student loan consultant to help create a customized repayment plan.

While some borrowers might find their advice valuable, either might find it’s not worth the expense – especially if they’re already struggling to find a way to make their loan payments. Here’s what you should keep in mind if you’re thinking of working with a student loan consultant.

What Is a Student Loan Consultant?

Americans owe nearly $1.8 trillion in collective student loans. As student loan debt has increased, student loan consultants have emerged to help students navigate the loan process. Most student loan consultants work independently from colleges or universities, and are not affiliated with specific repayment programs. Student loan consultants work one-on-one with borrowers to identify their repayment needs and try to set them up on a path of debt payoff success.

Knowing What They Can Help With

There are five main ways a student loan consultant can help you:

•   Recommending a student loan repayment strategy

•   Offering personalized guidance specific to your finances

•   Explaining student loan jargon

•   Researching your loan details

•   Communicating with lenders on your behalf

Before seeking out a student loan consultant, it might be helpful to identify your specific needs. If you don’t understand the difference between consolidation and refinancing, for example, then talking with a consultant about student loan jargon could be helpful.

If calling lenders sends you into a panic, maybe that’s where you want the consultant’s help. And if you’re struggling to make your minimum monthly payments, you could potentially talk to a consultant about finding a better student loan repayment plan.


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

Understanding What You’re Paying For

The cost of a student loan consultant can vary widely, and can come in the form of an hourly fee, flat rate, or annual fee. You could expect to pay anywhere from as little $50 to upwards of $600 or more for help from a student loan counselor. Making sure their services are worth the money you are paying is important, of course, and that can be done by confirming that their services aren’t something you could do on your own—like finding a federal income-driven repayment plan (which we’ll get into below). It’s also important to ensure that the cost doesn’t prevent you from making your student loan payments.

Before speaking with a consultant, finding out what is possible and what sounds too good to be true can help you weed out any scammy student loan consultants. And when you’re trying to understand what you can do on your own (without a consultant’s help), a good place to start is the Consumer Financial Protection Bureau .

Knowing What Programs Are Available for Free

A fair number of programs to help with student loan payments are available to everyone, without a fee. For example, before seeking out a student loan consultant, you could look into enrolling in a federal income-driven repayment (IDR) plan.

Typically, when you graduate from college or reduce your attendance to under half-time, you’re automatically put on the 10-year Standard Repayment Plan. However, borrowers looking to reduce the monthly payments on their federal student loans may qualify for an IDR plan, which reduces your monthly payment to a small percentage of your discretionary income and extends the repayment term up to 25 years (the exact details depend on the specific plan you choose). After the repayment period is up, any remaining balance is forgiven (but may be subject to taxes).

The newest IDR plan, Saving on a Valuable Education (SAVE), caps monthly payments at 5% to 10% of your discretionary income and shields more of your income from the payment calculation compared to older plans. It also forgives student loan debt as soon as 10 years into repayment for borrowers with smaller starting balances.

Because these repayment plans extend your loan term, you may pay more interest over the life of your loan. Even so, it could bring much-needed immediate relief and result in some loan forgiveness.


💡 Quick Tip: When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.

Asking a Neutral Party for Help

If you have a conflict regarding one of your federal student loans, you can ask for help from the Federal Student Aid Ombudsman Group , which serves as a neutral party. They can resolve discrepancies with loan balances and payments, and help identify loan repayment options. You can also try to resolve the dispute before contacting the Ombudsman Group. Or you can file a complaint through the Consumer Financial Protection Bureau.

Considering a Nonprofit Credit-Counseling Agency

The National Foundation for Credit Counseling can help you find a qualified credit counseling agency, which can aid you in creating a budget and even negotiating a new payment plan with creditors. The U.S. Department of Justice also offers an online database of credit-counseling agencies .

Making Sure the Consultant Isn’t Providing a Redundant Service

It’s important to make sure the consultant’s service isn’t something you could do on your own. For example, you could lower your monthly payment on your federal student loans by opting for an income-driven repayment plan without paying a consultant for their services.

You can also consider consolidating your federal loans through a Direct Consolidation Loan, which is also free. A Direct Consolidation Loan allows you to combine all of your federal loans into one, and gives you a new interest rate that’s a weighted average of your current interest rates, rounded up to the nearest eighth of a percent. While you won’t have a lower overall interest rate, you could lower your monthly payments and simplify the repayment process.

Refinancing Your Student Loans

If you’re looking for alternative ways to pay off your student loan debt, you could also consider student loan refinancing. When you refinance your student loans, you take out a new loan with a private lender and then use the proceeds to pay off one or more existing student loans. Ideally, the refinanced loan has a better interest rate and terms.

Extending your loan term through refinancing can lower your monthly payments. But it does mean paying more in interest over the life of the loan.

Alternatively, refinancing to a lower interest rate and shorter loan term could cost you less in interest over the life of the loan and help you pay it off faster. Keep in mind, however, that refinancing with a private lender means you’ll no longer be able to access federal loan benefits like income-driven repayment plans.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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If your student loan was sold to another company, you will be notified of your new servicer and make your same monthly payment to them. Your old lender will send the monthly payments to your new lender while this transition occurs, but it’s still ultimately up to you to make sure it’s getting to the new lender by the payment due date.

Selling student loans between companies is a common practice, but learning that your loan was sold to another company might feel jarring if you aren’t prepared for what this entails. If a student loan transfer occurs while you’re paying back your loan, here’s what you should know.

Student Loans Explained

Student loans are an installment-based financing option for students who don’t have cash on-hand to pay for their education. Federal loan funds are offered by the Department of Education, such as Direct Loans. You can also borrow private student loans from non-government sources, such as banking institutions, credit unions, and online lenders.

When you borrow a student loan, the lending company provides you with a lump-sum loan disbursement to pay for school. In exchange, you agree to make incremental monthly payments to the lender for the principal loan balance, plus accrued interest. Your repayment period is predetermined and is on your loan agreement. Typically, you’ll have multiple years to repay your student loan in full.

Most federal student loans, such as Direct Subsidized Loans and Direct Unsubsidized Loans, are not due until you graduate, withdraw, or drop below half-time enrollment. You will also have a six-month grace period on these loans. Private student loans typically are not due while in school, either, and may come with their own grace period. This will vary by lender, so make sure to look at all the details of the loan before signing.

How Selling Student Loans Works

While you’re engaging with your lender or servicer during the repayment period, a separate process can take place behind the scenes among lenders.

Whether you have federal or private student loans, the existing company that owns your loan might sell or transfer your student loans to another lender or servicer. How selling student loans works is essentially how it sounds. The current owner of your loan sells the loan account for the cost of the loan balance, plus an additional fee based on the loan terms.

Lenders sell the student loans they create to get the account off of its balance sheet and to increase their liquidity. Since the loan is sold at a premium, the original lender uses that money to create more loans for new borrowers.

Your Loan Servicer After a Student Loan Transfer

The new company that purchased your loan might technically be your lender and loan servicer; in this case, you’d make payments directly to your new lender.

Conversely, your new lender might have purchased your loan, but hired a third-party company to service the loan. In this scenario, you’d send your monthly payments to the third-party servicer that’s partnering with the loan company.

What to Do If Your Student Loan Is Transferred to Another Company

Transferring lenders shouldn’t greatly impact you or the terms of your loan. During the time leading up to the official transfer date and shortly afterward, however, you can protect yourself with a few simple steps.

Expect an Alert From the Company

Your current loan company should communicate the student loan transfer in advance. Typically, you’ll receive an email or mailed letter which details the new company’s name and contact information, transfer date, and possibly payment instructions for your repayment plan.

During this preliminary period, continue making payments based on your usual due date. If you just stop paying your student loan, you risk incurring late payments or delinquency.

Make Sure It Is Not a Scam

When public announcements about student loan transfers are released, scammers might take advantage of unsuspecting borrowers by posing as their new lender or servicer.

For example, you might receive an unsolicited phone call from a scammer alleging that they need your credit card number to set up your student loan account for auto-pay.

The best way to avoid scams for student loans during a transfer is by confirming the new company’s name and contact information directly with your original lender.

Contact New Company

Once you’ve confirmed who’s taking over your student loans, reach out to the new company to ask how you should make payments once your loan is transferred to its system.

After the transfer takes place, create an online account through the company’s website to access your student loan details. From there, make sure your payment information is correct and that you’ve enrolled in automatic payments, if desired. Upon creating your account, double-check that the loan data the company received matches your records.

This includes your remaining loan amount balance, interest rate, term, and repayment plan. If anything is incorrect, contact your servicer immediately to correct the issue.

Can I Refinance My Student Loans If They Are Transferred?

If your student loan was sold and you are dissatisfied with your experience with the new company, refinancing can be an option.

Refinancing student loans lets you transfer your student loan to another lender. The difference with this type of transfer is that it creates an entirely new loan in place of your old one. With a new refinance lender, your loan details, such as interest rate and terms, will change.

No two lenders have the exact same refinance student loan offer. Borrowers with a strong credit profile and low debt-to-income ratio, however, can qualify for the most competitive interest rates.

If you choose to refinance your federal student loans with a private lender, you will lose access to certain federal benefits, such as student loan forgiveness and income-driven repayment plans. If you are currently using these benefits or plan to in the future, it is not recommended to refinance your student loans.

Refinancing Your Student Loans With SoFi

Selling student loans is ultimately one way in which financial institutions can secure enough liquidity to create new loans for students. Although you don’t have control over whether your loan is sold or not, it doesn’t affect the fine details of your student loan debt. You’ll still owe the amount that’s unpaid for the duration of your term and be charged the same rate.

You do, however, have the option to refinance your student loans with a new loan and new lender. If you do choose to refinance, consider SoFi. Refinancing with SoFi lets you access low rates and it only takes two minutes to see if you prequalify.

FAQ

What happens when your student loan gets sold?

If your loan was sold to another company, your original loan’s unpaid balance, interest rate, and repayment terms remain the same. You’ll need to direct your payments to the new company if it’s also servicing your loan. If the new company purchased your loan, but is not servicing it, reach out to them to confirm where your payments should be sent.

What happens when student loans are transferred?

Your student loan details, including your outstanding balance, interest rate, and repayment period, won’t change during a student loan transfer. Before the transfer takes place, you’ll receive a notice from your lender or servicer. Once the transfer is complete, check your loan details to ensure it’s accurate, and confirm where to send future payments so they arrive on time.

Can a student loan be sold to a collections agency?

Yes. Student loans that are in default — meaning the borrower has stopped making payments for an extended period — can be sold to a collections agency. The collection agency will take every legal measure to collect the unpaid debt, including suing you in court.

Photo credit: iStock/LumiNola
SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

Student loan debt is at an all-time high, with more students graduating with debt than ever before. Consider this: Almost 44 million borrowers have federal student loan debt and they owe, on average, $37,338. As recent graduates begin their careers, it can be overwhelming to figure out how to make monthly student loan payments.

Ignoring your payments may seem like an easy way out, but student loan default can have extreme consequences. If you’re struggling with student loan payments or are already in default, there are ways to recover. For instance, you could consolidate defaulted student loans. Refinancing defaulted student loans may also be an option. This guide will help you figure out your best option.

What Is Student Loan Default?

If your student loan is in default, it means you have failed to make payments on your student loans for several months in a row. However, there are a few steps that occur before defaulting on student loans.

Federal student loans are considered delinquent once you miss a student loan payment. After 90 days of delinquency, your loan servicer can report the missed payments to the three major credit bureaus. Generally, after 270 days of nonpayment, your loan will go into default.

If you have private student loans, they can go into default even sooner. Typically, after you miss three payments or 120 days, your private student loans go into default. Different lenders have different terms when it comes to default, however, so be sure to check with yours to get the specifics.


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

How Common Is Defaulting on Student Loans?

Defaulting on student loans is fairly common. The latest data from EducationData.org finds that one in 10 student loan borrowers has defaulted on a loan. In fact, roughly 4 million student loans go into default every year, and about 7% of loans are in default at any given time. As of 2021, the median loan balance among delinquent and defaulted borrowers was $15,307.

What Are the Consequences of Student Loan Default?

Defaulting on your student loans can have some steep consequences. For starters, the entire balance of your student loans could become due in full.

If you default on your student loans, your lender may eventually turn your debt over to a collection agency who will usually start calling, emailing, and even texting you to try and collect on your debt. You may even have to pay collection fees on top of everything else.

If you default, you may lose eligibility for programs that could help you manage your debt, such as deferment, forbearance, or Public Service Loan Forgiveness.

Once your student loans are in default, your loan servicer or collection agency will report your default to the three major credit bureaus, which will negatively impact your credit score.

And if your servicer can’t collect the money you owe on your federal student loans, they can ask the federal government to garnish a portion of your wages or your tax refund.

How Can You Recover From Student Loan Default?

If you failed to make payments on your student loans and they’ve gone into default, you don’t have to let it ruin your financial future. Here are some steps you can take to get back on track.

Loan Rehabilitation

One option for getting out of student loan default is student loan rehabilitation. To rehabilitate your loan, you work with your loan servicer and agree in writing to make nine reasonable and affordable monthly payments over a period of 10 months.

In order to rehabilitate a Direct Loan or FFEL program loan, your monthly payments must be no more than 20 days late. Your loan servicer will determine the new monthly payment, which is 15% of your discretionary income.

When you have successfully rehabilitated your loan, the default may be wiped from your credit history. Note that any late payments reported to the credit bureaus before the loan went into default will remain on your credit reports.

Private student loans are not eligible for rehabilitation.

Consumer Credit Counseling Services (CCCS)

Credit Consumer Counseling Services (CCCS) are typically nonprofit organizations that offer free or low-cost counseling, education, and debt repayment services to help people regain control of their finances and make a plan to get out of debt.

If you’ve defaulted on your student loans, a credit counselor can help by analyzing your financial situation and student debt, laying out all the options for student loan debt relief, and helping you choose the best path forward.

CCCS agencies can also help you set up a budget and manage other debts. In some cases, they will work with your creditors to come up with payment plans where creditors agree that they will not pursue collection efforts or charge late fees while on the plan.

One word of caution: Credit counseling agencies are not the same thing as debt settlement companies, which are profit-driven businesses that often charge steep fees for results that are rarely guaranteed. Even if they are successful in reducing your debt, their fees (plus the unpaid interest and late payment charges on the debt) can add to what you initially owed, reducing your actual savings.

To ensure you find a reputable credit counselor, you might start your search using the U.S. Department of Justice’s list of approved credit counseling agencies.

Repaying Your Loan in Full

Another option to get out from under the shadow of student loan default is to repay your loans in full. Of course, if you had the funds to do so, you probably wouldn’t have defaulted in the first place. That said, you could look into ways to cover the balance due, such as borrowing from a family member or close friend.

Options for Private Student Loans

If you have private student loans that are in default, you can contact your lender and see what possibilities are available. Some lenders may have hardship options similar to the federal programs. As mentioned, the time it will take for your unpaid private loan to go into default depends on the lender — but the timeframe could be relatively short, even just 120 days.

However, if you’ve only recently missed a payment, you can start making payments again (and repay the missed payment) to try to prevent your loan from going into default.

Is Refinancing an Option for Defaulted Student Loans?

If your student loans are currently in default, refinancing your loans can be difficult. When you refinance your student loans, you take out a new loan with a private lender to pay off the existing loans. When you apply for a refinancing loan, lenders will use your credit score and financial history, among a few other factors, to determine if you qualify.

If your loan is already in default, your credit score has likely decreased significantly and will likely impact your ability to get approved for a new loan. If you have a family member or friend who is willing to cosign the loan, however, you may be able to refinance your student loans that way.

Another possibility for refinancing your student loans would be to rehabilitate your loans first. A lot of lenders might turn you down for having a defaulted loan on your credit history, but others might be willing to look past that and onto your education and income potential to approve you for a loan.

💡 Quick Tip: When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.

Can you Consolidate Defaulted Student Loans?

Another way to recover from student loan default is to consolidate your student loans in default. If you have federal loans, you can pursue defaulted student loan consolidation with the Direct Consolidation Loan program. This program allows you to combine one or more federal loans into a new consolidation loan.

To be eligible, you must either make three full, on-time, and consecutive payments on the defaulted loan or agree to make payments on an income-driven repayment plan.

Private student loans aren’t eligible for Direct Consolidation Loans. However, you can consolidate these loans with a private lender by refinancing.

Tips for Consolidating Defaulted Student Loans

Wondering how to consolidate defaulted student loans? To consolidate federal student loans, first gather all the documents you need. This includes your personal information such as your name, address, email, Social Security number, and FSA ID; financial information such as your income; and details about your loans, including amounts, account numbers, and loan servicers.

Next, go to studentaid.gov to fill out the Direct Consolidation Loan application. You’ll need your FSA ID to log in. Specify the loans you want to consolidate.

Then, choose one of the income-driven repayment plans if that’s the option you prefer. Review the plans in advance to determine which one is the best option for you.

Filling out the application typically takes less than 30 minutes.

Pros and Cons of Student Loan Consolidation

Choosing to consolidate defaulted student loans has advantages and disadvantages you’ll want to weigh before you move forward.

Advantages include:

•   One loan and one monthly bill. This means there will be less for you to keep track of.

•   Lower payments. When you consolidate, you can choose an income-driven repayment plan or to lengthen the term of your loan, which could lower your monthly payments. (Note: You may pay more interest over the life of the loan if you refinance with an extended term.)

•   Fixed interest rate. You’ll get a fixed interest rate for the life of your loans with Direct Loan Consolidation. The new rate is a weighted average of all your federal loan rates, rounded to the nearest eighth of a percent.

•   Access to forgiveness programs. With a Direct Consolidation Loan, you might be able to get access to programs you weren’t eligible for previously, such as Public Service Loan Forgiveness.

Disadvantages include:

•   Longer repayment period. You could end up repaying your loans for an extra year or two, which will cost you more overall.

•   Pay more in interest over the life of the loan. With consolidation, the outstanding interest on your loans is added to the principal balance, and interest may accrue on that higher balance.

•   Possible loss of benefits. Consolidating loans other than Direct loans could mean giving up perks you have with those loans, such as rebates or interest rate discounts.

This comparison chart of the pros and cons of student loan consolidation can be helpful as you consider the question of should you refinance or consolidate your loans.

How to Manage Student Loans Without Going Into Default

If you’re struggling to make student loan payments but haven’t yet defaulted on your loan, taking action now could help prevent financial issues in the future. Here are some options that could help you take control of your student loan debt and avoid going into default.

Take Advantage of the Temporary Grace Period

Federal student loan payments and interest accrual has been paused since March 2022 in order to alleviate some of the financial challenges created by the coronavirus pandemic. However, the latest debt ceiling bill officially ended the payment pause, requiring interest to begin accruing again on Sept. 1. and payments to resume on October 1.

The Department of Education understands that restarting student loan payments after such a long pause will put many borrowers in a difficult financial position. So to prevent struggling borrowers from facing the harsh penalties of defaulting on their loans, there will be a 12-month ramp-up period to help borrowers adjust to repayment.

During this period, which takes place from Oct. 1, 2023 to Sept. 30, 2024, federal student loan borrowers who don’t make their payments on time and in full will not be reported to the credit bureaus, have their loans placed in default, or be referred to debt collectors.

Forbearance or Deferment

If you’re unable to make payments on your student loans due to a sudden and temporary economic change, you might consider applying for student loan deferment or forbearance. Both allow you to temporarily pause your loan payments.

If your loans are in forbearance, which is granted for 12 months at a time, you will be responsible for paying accrued interest during the forbearance period. If your loans are placed in deferment, which can last up to three years, you may not be responsible for accrued interest during the deferment period, depending on the type of loan you hold.

While your loans are in deferment or forbearance, you do have the option to make interest-only payments on the loan. If you choose not to, the accrued interest on most loans will be capitalized, or added to the principal balance. You’ll then be charged interest based on the larger loan amount.

Applying for Income-Driven Repayment (IDR)

Another option to help manage your student loans is income-driven repayment. There are four income-driven repayment plans available to federal student loan borrowers. Depending on the type of plan you qualify for, your monthly payments will be anywhere from 10% to 20% of your discretionary income. (Beginning in July 2024, the new SAVE plan will adjust payments to 5% of discretionary income.)

Income-driven repayment plans also stretch out the repayment term of the loan to either 20 or 25 years, depending on the specific plan. This means that while you could pay less per month, income-driven repayment could cost you more in interest over the life of the loan. The good news is that if you have any remaining debt at the end of the term, it will be forgiven (but you may need to pay income taxes on the canceled amount).

Consolidating Your Loans

Even if you’re not in default, you can consolidate your federal loans through the Direct Loan Consolidation program. As mentioned, the new interest rate will be the weighted average of the existing loans, rounded to the nearest eighth of a percent. So you won’t lower your effective interest rate, but you’ll only have to keep track of one monthly payment.

Refinancing Your Loans

If your monthly student loan payments are difficult for you to manage, you could consider refinancing with a private lender. If you have a combination of private and federal student loans, you could refinance both types into a single, private loan.

Refinancing can give you an opportunity to qualify for a lower interest rate or lower monthly payments, and you’ll only have to worry about tracking one payment each month. You may also be able to customize your repayment term — either lengthening or shortening the term.

By lengthening the term, you could reduce your monthly payments, but you may end up spending more money in interest over the life of the loan. To see how refinancing could impact your student loans, plug your numbers into this student loan refinance calculator.

It’s important to note that if you’re thinking of taking advantage of any federal programs such as income-driven repayment or Public Service Loan Forgiveness, refinancing may not be a good idea, as you’ll lose your eligibility for these programs.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

Does consolidating student loans remove default?

No. When you consolidate your student loans, the record of the default will stay on your credit history. Another option is loan rehabilitation, which removes the default from your credit history.

Can you consolidate defaulted student loans?

Yes, you can consolidate defaulted student loans. If you have federal loans, you can consolidate them with Direct Loan Consolidation. To be eligible, you must either make three full, on-time, and consecutive payments on the defaulted loan or agree to make payments on an income-driven repayment plan. You can fill out an application at studentaid.gov. You can consolidate private student loans with a private lender.

Can you refinance student loans that are in default?

You can refinance student loans that are in default, but it may be difficult. That’s because your credit score has likely decreased, which may impact your ability to get approved for refinancing. If you have a family member or friend who is willing to cosign the loan, you may be able to refinance your student loans that way. Or, you could rehabilitate your loans first, which could help improve your odds of being approved for refinancing.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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Defaulting on student loans is something that happens after you miss a series of payments on your loan. The number of loan payments missed before the loan enters default varies between federal and private student loans, but the consequences of defaulting on either type can be severe — including having the loans go to a collections agency and potential negative impacts on your credit score.

For a year following the resumption of federal student loan payments in October 2023, a temporary “on-ramp” transition period means that missing required monthly payments generally won’t lead to defaulted loan status. Below we discuss how this on-ramp works, as well as what typically happens if you miss your required federal student loan payments.

What Is Student Loan Default?

Student loan default is a term for when you completely stop paying student loans. This can occur if you fail to make required monthly payments on federal or private student loans. Millions of federal student loan borrowers, however, did not have to make any required payments during the Covid-19 forbearance.

Most federal student loan borrowers had a 0% federal student loan interest rate from March 13, 2020, until Sept. 1, 2023, under the pandemic-era payment pause. These borrowers, including those with defaulted and nondefaulted loans held by the U.S. Department of Education, did not have to make federal student loan payments over that three-year period.

The 2023 debt ceiling bill officially ended the Covid-19 forbearance, requiring federal student loan interest accrual to resume on Sept. 1 and payments to resume in October 2023. Any federal student loan borrower who received the Covid-19 forbearance relief will be eligible for the 12-month on-ramp protection automatically.

If you’re covered by the on-ramp, you’re protected from having your federal student loans reported as delinquent or placed in default from October 2023 through September 2024. But federal student loan interest will still accrue during the on-ramp, so failing to pay may increase your student debt burden.


💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

Student Loan Default vs. Delinquency

Student loan delinquency is the early stage of missing a required loan payment when due. If you fail to pay over an extended period, you could face greater consequences for reaching late-stage delinquency and carrying defaulted student loans.

Federal student loans are typically considered delinquent when you’re past due on a required payment by at least one day but less than nine months. Federal student loans are typically reported to the credit bureaus as delinquent if you are 90 or more days past due.

A delinquent federal student loan typically becomes defaulted if you fall at least 270 days past due on a required payment. The typical metrics of delinquency vs. default don’t apply during the on-ramp of October 2023 through September 2024 for eligible borrowers who miss payments during that 12-month period.

Lenders of private student loans can set their own parameters for delinquency vs. default. Banks, credit unions, fintech companies, and state-related nonprofits offer private student loans. Some may consider you in default if you are 60 or more days delinquent on a private student loan. Others may define default as falling 180 days past due after receiving a final demand letter.

Can You Default on Student Loans?

Yes, it’s possible for borrowers to default on student loans. If a borrower is struggling to make monthly payments on their student loans, default can be an option if they do not take any other action. If you are having issues making monthly payments on your federal student loans and just stop making payments, after a certain number of missed payments, the loan will enter default.

Private student loans can also go into default, though they may enter default more quickly than a federal student loan.

Recommended: What is the Student Loan Default Rate?

How to Default on Student Loans

To get more technical, defaulting on federal student loans is a process that takes place over a period of nonpayment. Typically when you first miss a payment, the loans are delinquent but not yet in default. At 90 days past due, your lender can report your missed payments to credit bureaus. And when you reach 270 days past due, your student loans are typically considered in default.

Keep in mind that most federal student loans are protected from entering default during the on-ramp period. (If you entered the Covid-19 pandemic with a defaulted federal student loan held by the U.S. Department of Education, the Education Department in December 2022 started reporting those loans as “current” rather than “in collections” to credit reporting agencies.)

Here’s what you can expect if you’re eligible for the on-ramp from Oct. 1, 2023, through Sept. 30, 2024:

•   You won’t be considered delinquent if you miss a required payment

•   Late payments or missed payments won’t be reported to the credit bureaus

•   Your loans won’t be placed in default

•   Debt collection agencies won’t contact you about your on-ramp eligible loans

For private student loans, the terms for defaulting can vary. Private student loan lenders may report an account as delinquent when it’s 30 days past due and consider you in default if you’re 60 days or more past due on a required payment.

Private lenders may also place student loans in default if the borrower declares bankruptcy, passes away, or defaults on another loan. Terms may vary by lender, so if you have private student loans, double-check how they define default.

Defaulting on your federal or private student loans can have serious consequences, but there are ways to avoid defaulting on your student loans or recover if your loans are currently in default. If you’re worried about student loan default, the most important thing you can do is educate yourself on what it is, and how to avoid it.

Below we highlight four potential consequences of what happens when your student loans default.

What Happens When Your Student Loans Default?

Here are four potential consequences of what can happen if you default on your federal or private student loans:

1. Collection Agencies Might Come Knocking

When a borrower defaults on student loans, the lender may eventually turn the debt over to a collection agency. The collection agency will then attempt to recover the payment, typically bombarding you with frequent letters and phone calls.

Collection agencies may also attempt to determine what other assets, including bank accounts or property, would allow you to pay your debt. On top of dealing with regular calls from debt collectors, you may also be responsible for paying any additional fees the collection agency charges on top of your student loan balance.

2. Loan Forgiveness and Forbearance Options Are No Longer on the Table

Student loan default on federal loans means that the federal government can revoke your access to programs that might make it easier for you to pay your loans, including loan forgiveness or forbearance. This means that even if you qualify for something like the Public Service Loan Forgiveness program, you could be rendered ineligible if you let your loans go into default.

Additionally, borrowers in default may lose eligibility for all future types of federal financial aid.

3. Your Credit Score Might Be Impacted

Once your student loans are in default, the lender or the collection agency will report your default to the three major credit bureaus. This means that your credit score could take a hit. A low credit score can make it harder for you to get a competitive interest rate when borrowing for other needs, like a car or home loan. In fact, having federal student loans in default can make it difficult to buy or sell real estate and other assets.

4. You Might Have to Give up Your Tax Refund, or a Portion of Your Wages

If your loan holder or a collection agency can’t recover the amount owed, they can request that the federal government garnish your tax refund and even some of your income. For example, if you filed your taxes and were eligible for a refund, the government would instead take that refund money and apply it toward your defaulted student loan balance. On top of that, the government can garnish your wages, which means that they can take up to 15% of each paycheck to pay back your loans.

Recommended: What Happens When Your Student Loans Go to Collections?

How Can You Get Student Loans Out of Default?

Defaulting on student loan debt is a serious matter, but the good news is that there are ways of getting out of default.

First, stop avoiding those collection calls. If your student loan provider or a collection agency is calling, your best bet is to meet your lender or the agency head-on and take charge of the situation. The lender or the collection agency will be able to talk through the repayment options available to you based on your personal financial situation. They want you to pay, which means that they might be able to help find a payment plan that works for you.

The lender may be able to offer a variety of options tailored to your individual circumstances. Some of these options might include satisfying the debt by paying a discounted lump sum, setting up a monthly payment plan based on your income, consolidating your debts, or even student loan rehabilitation for federal loans (more to come on this). Don’t let your fear stop you from reaching out to your lender or the collection agency.

How to Avoid Defaulting on Student Loans

Of course, even if you can get yourself out of student loan default, the default can still impact your credit score and loan forgiveness options. That’s why it’s generally best to take action before falling into default. If the student loan payments are difficult for you to make each month, there are things you can do to change your situation before your loans go into default.

First, consider talking to your lender directly. The lender will be able to explain any alternate student loan repayment plans available to you.

For federal loans, borrowers may be able to enroll in an income-driven repayment (IDR) plan. These repayment plans aim to make student loan payments more manageable by tying them to the borrower’s income. This can make the loans more costly over the life of the loan, but the ability to make payments on time each month and avoid going into default are valuable.

The Saving on a Valuable Education (SAVE) Plan is one of the IDR options to consider if you’re a federal student loan borrower. The SAVE Plan is the most affordable repayment plan for federal student loans, according to the U.S. Department of Education. Borrowers who are single and make less than $32,800 a year won’t have to make any payments under the SAVE Plan. (If you are a family of four and make less than $67,500 annually, you also won’t have to make payments.)

Is Refinancing an Option?

Refinancing student loans could potentially help you avoid defaulting on your student loans by combining all your student loans into one, simplified new loan. When you refinance student loans, you might be able to secure a lower interest rate or loan terms that work better for your situation.

If a borrower is already in default, refinancing could be difficult. When a student loan is refinanced, a new loan is taken out with a private lender. As a part of the application and approval process, lenders will review factors including the borrower’s credit score and financial history among other factors.

Borrowers who are already in default may have already felt an impact on their credit score, which can influence their ability to get approved for a new loan. In some cases, adding a cosigner to the refinancing application could help improve a borrower’s chances of getting approved for a refinancing loan. Know that if federal student loans are refinanced they are no longer eligible for federal repayment plans or protections.


💡 Quick Tip: When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.

Help on Defaulted Student Loans

If you default on a federal student loan, here are some programs that can help you get them out of default:

Loan Rehabilitation

To apply for student loan rehabilitation, contact your loan servicer. In order to rehabilitate your federal student loan you must agree to make nine voluntary, reasonable, and affordable monthly payments within 20 days of the payment due date. This agreement must be completed in writing. All nine payments must be made within 10 consecutive months.

Private student loans do not qualify for federal student loan rehabilitation. Federal Direct Loans or loans made through the Federal Family Education Loan (FFEL) program qualify for student loan rehabilitation.

Loan Consolidation

Consolidating your federal student loans into a Direct Consolidation Loan is another option to get your defaulted federal student loans out of default. To consolidate defaulted federal student loans into a new Direct Consolidation Loan you have two options, which are:

•   Repaying the consolidated loan on an income-driven repayment plan.

•   Making three monthly payments on the defaulted loan before consolidating. These payments must be consecutive, voluntary, on-time, and account for the full monthly payment amount.

Again, private student loans are not eligible for consolidation through a Direct Consolidation Loan.

Recommended: Understanding How Student Loan Consolidation Works

Consumer Credit Counseling Services (CCCS)

Credit Consumer Counseling Services (CCCS) are usually non-profit organizations that offer free or low-cost counseling, education, and debt repayment services to help people facing financial difficulties.

If you’ve defaulted on a student loan, a credit counselor can help by looking at your entire financial situation along with your student debt, laying out your options, then working with you to come up with the best option for student loan debt relief.

If you’re struggling with multiple debts, a credit counselor may be able to set up a debt management plan in which you make one monthly payment to the credit counseling organization, and they then make all of the individual monthly payments to your creditors.

While counselors usually don’t negotiate down your debts, they may be able to lower your monthly payments by working with your creditors to increase your loan terms or lower interest rates.

Just keep in mind: Credit counseling agencies are not the same thing as debt settlement companies. Debt settlement companies are profit-driven businesses that often charge steep fees for results that are rarely guaranteed. Debt settlement can also do long-term damage to your credit.

To avoid debt settlement scams and ensure you find a reputable credit counselor, you might start your search using the U.S. Department of Justice’s list of approved credit counseling agencies.

The Takeaway

Student loan default can have serious negative effects on your credit score and financial stability. If you’re worried about defaulting on your student loans, or you have already defaulted, consider taking immediate steps to remedy the situation before it gets worse. Contact your lender or loan servicer to learn about options available, and consider refinancing your loans to secure a lower interest rate or monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.)

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

Does a defaulted student loan ever go away?

It is possible to rehabilitate or consolidate a defaulted federal student loan to get it out of default. Some private lenders may offer programs or assistance to borrowers facing default, but they are not required to do so.

Will my student loans come out of default if I go back to school?

No, if you have student loans already in default, going back to school will not remove them from default. Students who have student loans in default will need to get the loans out of default before they will qualify to borrow any additional federal student loans.

Are defaulted student loans forgiven after 20 years?

Defaulted loans are not forgiven after 20 years. Students in default may consolidate or rehabilitate their loan and then enroll in an income-driven repayment plan, which could potentially qualify them for loan forgiveness at the end of their loan term, up to 25 years.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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