Student Loan Default: What It Is and How to Financially Recover

Abigail Eun
Abigail Eun

Abigail Eun is a freelance writer and personal finance expert. Through diligent research and continuous learning, she has honed her knowledge in budgeting, saving, investing, and debt management. Abigail is passionate about helping people get their finances in order. She believes that everyone should have access to the information they need to make sound financial decisions. Her goal is to provide clear and concise information that is easy to understand.

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Daniel Kahn
Daniel Kahn
Daniel is the co-founder and COO at Sparrow. Daniel is responsible for the day-to-day operations of a company, working closely with other members of the executive team to develop and implement strategies to support the growth and success of the company.
Daniel was a 2023 Forbes 30 Under 30 lister in the Education category.  Daniel was born and raised in Raleigh, North Carolina and graduated from Duke University in 2020.
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Camden Ford
Camden Ford

Camden leads Sparrow’s business operations – everything from product management to business analytics. After graduating Cum Laude from Duke University where he studied Civil Engineering, Camden worked as a Consultant for A.T. Kearney where he worked in their Strategic Operations practice. With a strong background in analytics, Camden strives to deliver data-driven conclusions and insights.

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November 10, 2023

According to the Education Data Initiative, around 15% of student loans are in default at any given time.

If you are in student loan default, it’s understandable to feel overwhelmed and discouraged. However, don’t lose hope. There are many ways to financially recover from it. 

Jump Ahead > What is Student Loan Default? • What Happens Before Default?When Does a Student Loan Enter Default? • How to Know if Your Student Loans are in Default • What Happens if You Default on a Student Loan? • How to Recover From Student Loan Default • How to Fix Your Credit After Defaulting

What is a Student Loan Default?

A student loan default happens when you fail to repay a loan according to the terms outlined in your loan contract (also known as a promissory note). 

What Happens Before Default?

Before a federal student loan default, your loan enters into a stage called delinquency. You enter into loan delinquency when you miss one federal student loan payment. 

While your federal student loan is delinquent, you still have the opportunity to:

Contact your loan servicer to discuss your next steps as soon as you enter federal loan delinquency. It is crucial to take advantage of the federal borrower protections you have while you are delinquent so you will not default on your loan.

On the other hand, private student loans do not enter delinquency after a missed payment. They simply default after you miss the number of payments outlined in your promissory note. Contact your loan servicer to discuss what options you have after missing a payment. Depending on your loan, you may have to enter loan deferment/forbearance, or lower your monthly payment temporarily. 

When Does a Student Loan Enter Default?

Federal and private student loans enter default at different points.

Federal student loans enter default if payment has not been made for 270 days, or around around nine months of missed payments. Defaulting on a federal student loan makes you ineligible for forbearance and deferment, repayment plans, and applying for any other federal student loans.

Private student loans usually enter default after you miss three monthly payments, or if payment has not been made for 90 days. They can also enter default if you declare bankruptcy, default on another loan, or pass away. However, not all loans default after three missed payments.

Always read the fine print on your promissory note to be aware of the specific default timeline for your loan. 

How to Know if Your Student Loans are in Default

To verify whether your student loans are in default or not, you have the following options:

  1. Contact your loan servicer. This is the best way to determine whether your loans are in default, as your servicer will be able to provide you with up-to-date information. 
  2. For federal student loans: Log into your Federal Student Aid account and check whether or not your loans have entered into default. You may be able to find similar information by logging into your private student loan account as well.
  3. Check your credit report. Your credit report will list all federal and private student loan defaults. However, this may not be the most accurate way to check because credit reports are not constantly being updated.

What Happens if You Default on a Student Loan?

Student loan default can impact you in the following ways: 

Your credit score is damaged.

Entering student loan default and missing loan payments will be reflected on your credit history for the next seven years. Because your credit score will be significantly impacted, your chances of qualifying for new lines of credit may be extremely difficult (and in worst cases, impossible). 

You’ll owe more money.

Despite being in loan default, late fees and interest will continue to be applied to your debt. Debt collection agencies may also charge collection fees, adding to the amount of money you owe. Try to get your loan out of default as quickly as possible to avoid incurring additional costs. 

You may be contacted by debt collectors.

A collection agency is a company that loan servicers use to recover loans in default. 

If you default on a federal loan and make no actions for payment arrangements, loan servicers can place your loan with a collection agency. Defaulted private loans are considered “uncollectible,” or “charged-off,” and can be sold to a collection agency. 

Once your defaulted loan is in the hands of a collection agency, debt collectors can contact you to recover your delinquent funds. Oftentimes, debt collectors will use aggression or scare tactics to coerce you into paying off your debt. 

That said, debt collectors are legally obligated to follow the Fair Debt Collection Practices Act, which provides borrowers certain rights. If any of your rights are violated, submit a complaint to the Consumer Finance Protection Bureau. 

The federal government may withhold your wages, tax refunds, and/or federal benefits.

To collect on federal student loans, your loan servicer has the legal discretion to withhold your wages, tax refunds, and government payments. In addition to garnishment, you will not be eligible for any federal financial aid or federal borrower benefits.

Your loan servicer may sue you.

Unlike federal student loans, private student loan servicers cannot garnish your wages or tax refunds. Instead, however, they have the legal discretion to take you to court. If you are sued by your loan servicer, the court can rule in their favor and require you to give up your bank accounts, paychecks, or any capital to pay off your debts. 

Your professional license can be suspended.

License suspension laws vary from state to state, but bear in mind that any licenses you have (ex. professional license, driver’s license, etc.) can be suspended if you default on your student loans. While this may be an extreme case, it is still possible.

How to Recover from a Student Loan Default

If you have defaulted on a student loan, do not feel discouraged. You still have many opportunities to recover from a student loan default.

How to Recover from Federal Student Loan Default

If you want to recover from a federal student loan default, consider the following options. 


Usually, student loan rehabilitation is the best way to recover from federal student loan default because it removes the default from your credit report (though late repayments will remain).

To enter federal loan rehabilitation, you need to: 

  1. Contact your loan servicer to inquire about loan rehabilitation. 
  2. Make nine consecutive monthly payments that are 15% of your discretionary income. You may request a lower amount if need be. 

Note, however, that loan rehabilitation is a one-time opportunity


Student loan consolidation is when you merge your defaulted loan(s) and current loan(s) into one Direct Consolidation Loan

To consolidate your defaulted federal loans, you need to:

  1. Agree to repay the new Direct Consolidation Loan under an income-driven repayment plan.
  2. Make three consecutive, on-time, full monthly payments on the defaulted loan. 
  3. Enroll in Fresh Start.

What is Fresh Start?

Fresh Start is a new federal program that aims to help defaulted borrowers. The program will begin in December 2023, a year after the COVID-19 payment pause ends. 

Through Fresh Start, borrowers will temporarily recover student aid benefits and have the opportunity to get out of loan default.

Federal Student Aid (FSA) will reach out to you in the coming months if you are eligible to participate in Fresh Start. Therefore, you’ll want to make sure your contact information is up-to-date with your loan servicer. 

Which Is Better for a Federal Student Loan Default: Loan Rehabilitation or Loan Consolidation?

Between federal loan rehabilitation and loan consolidation, there is no “right” answer. Instead, you should examine which option best meets your financial needs. 

That said, there are a few things you should consider as you make your decision:

  1. Loan rehabilitation is a one-time opportunity. If you fail to rehabilitate your loan(s) the first time around, you will not be able to do it again.
  2. Loan rehabilitation requires nine monthly payments, while loan consolidation only requires three monthly payments to qualify. 
  3. Loan rehabilitation removes the loan default from your credit history, though any reported missed payments will remain. Loan consolidation does not remove your default.

The following chart details the benefits you gain from loan rehabilitation and loan consolidation.

BenefitsLoan RehabilitationLoan Consolidation
Loan DefermentYesYes
Loan ForbearanceYesYes
Eligibility for Federal Financial AidYesYes
Repayment PlansYesYes
Loan ForgivenessYesYes
Removal of Default from Credit HistoryYesNo

How to Recover From Private Student Loan Default

Unfortunately, private student loans don’t offer the same recovery options as federal student loans. You will need to contact your lender to discuss options for getting out of loan default. You may be able to negotiate a resolution or work out a payment plan that works for your financial needs.

If you need additional assistance, consider contacting a student loan lawyer.  

How to Fix Your Credit After Defaulting

Take the following steps to fix your credit after defaulting on student loans:

Get out of default.

The first thing you should do to repair your credit after a default is ensure that you are completely out of default.  While getting out of default won’t instantly fix your credit score, it’s the first step in getting it back up.

Pay off your debts.

In addition to paying off your defaulted loan, you will want to stay on top of paying off any other debts you may have (credit card debt, home mortgage, etc.) Having less debt will lower your debt-to-income ratio, which in turn will help raise your credit score. 

Do not open new lines of credit.

While you might consider borrowing a personal loan to pay off your student loans, experts advise against this. Borrowing more money will only put you in further debt. Instead, use your current resources to manage your debt balances. 

Closing Thoughts From the Nest

While defaulting on a student loan may feel like the end of the world, you can still recover from it. The best thing to do is to attempt to get out of it. Contact your lender or loan servicer as soon as possible to set up payment arrangements that work for you. In addition to that, remember your borrower rights if you are contacted by debt collectors.

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