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Plan Well, Retire Well

Saving and investing your money

What to do when you fall behind: Student loan default and how to deal with it

This is the fourth post in a series about student loans by guest blogger Sharon Cabeen. Sharon is director of financial literacy program operations with TG. You can reach her at (800) 252-9743, ext. 6781, or by email at Additional information about TG can be found online at

Thanks, Sharon, for providing this useful information for our readers.

People go to college for many reasons – seeking new experiences and friendships, expanding their knowledge of the world, and, of course, enhancing their career options. For all the varied aims new college students may have, however, we can be sure they're not aiming for damaged economic prospects.

No one enters college with the thought, "I hope I default on my student loans one day."

Sadly, many student loan borrowers reach that destination despite never setting out to travel there. The reasons students default are nearly as varied as the students themselves: they may be struggling to find work after leaving school; they may be poorly organized, misplacing (or even failing to open) correspondence from their loan holders or servicers; they may have poorly understood their repayment obligation to begin with; or they may simply not have the money.

Consequences of default

Whatever the reason, failing to meet your repayment obligation can have unpleasant consequences. Even missing one or more payment deadlines will place a borrower's loan into delinquent status, potentially causing:

  • Damaged credit, making it difficult to take out a car loan, obtain a mortgage loan, or even get approval on an apartment lease; and
  • Increased costs, including late fees and the potential for increased interest rates.

If your student loan is delinquent for more than nine months, the loan is in default. Defaulting on a student loan has serious consequences, and may cause any (and many) of the following:

  • The full amount of the outstanding balance will automatically become due and payable;
  • Collection costs will be added to the balance due;
  • The default will be reported to all nationwide consumer reporting agencies;
  • The borrower will no longer be eligible for any federal student aid;
  • The borrower may lose access to transcripts and academic records;
  • The borrower may be subject to administrative wage garnishment, meaning money will be deducted directly from his or her paycheck, without consent;
  • The borrower may forfeit any tax refunds; and
  • In some states, the borrower may be subject to loss of lottery winnings, disbursements made by state authorities, or professional licenses, until the situation is resolved.

What now? Dealing with default

If you find yourself in default, don't give up! There are things you can do to improve the situation. In order to get back on track, you should:

  • Contact the holder or servicer of your defaulted loan, which may be your student loan guarantor or the Department of Education. Your loan holder or servicer can counsel you about the best options for resolving your default. If you don't know your loan holder or servicer, you can find them by accessing the National Student Loan Data System at
  • Establish a new repayment agreement by:
  • Rehabilitating your defaulted loan(s). You can do this by making nine consecutive, on-time, full, voluntary monthly payments to the holder of each defaulted loan(s).
  • Consolidating your defaulted loan(s) and making three consecutive, on-time, full, voluntary monthly payments to the holder of each defaulted loan(s).
  • Stick to your repayment agreement. To get out of default, you must re-establish a good habit of making your student loan payments on time and in full.

One more thing: if you're still a student and need additional financial aid, you can also reinstate your eligibility for federal student aid by making six consecutive, on-time, full, voluntary monthly payments to the holder of each defaulted loan(s). If you pursue this option, remember to apply for aid as early as possible. By having your financial aid application on file, your school can award your loan as soon as your eligibility for federal student aid is reinstated.

For more information

For more information about each of these options, visit TG's Repaying Defaulted Loans page.

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