Borrowers with defaulted student loans have until May 5 to stop them from being sent to collections.
If your student loans are in default, you have just over a week to stop them from being sent to collections, which can result in the government garnishing your wages and possibly withholding your tax refund and Social Security benefits.
After five years of payment pauses and delays, the US Department of Education announced April 21 that student loan payments and collections will resume May 5, with wage garnishment beginning this summer.
“The Biden administration misled borrowers: the executive branch does not have the constitutional authority to wipe debt away, nor do the loan balances simply disappear,” Education Secretary Linda McMahon said in the statement.
Loan servicers can report loans as delinquent after they’re 90 days past due, damaging your credit score. Loans that are 270 days past due go into default, which comes with even more severe consequences, such as wage garnishment.
The Education Department said more than 5 million borrowers have not made a monthly payment in more than 360 days and sit in default. That’s a lot of people trying to resolve defaults before the May 5 deadline, particularly after the department slashed its staff. Experts advise taking action now.
“This action only affects loans in default, not borrowers in repayment, including those enrolled in the SAVE plan in an interest-free forbearance,” student loan expert Elaine Rubin said in an email. “Borrowers in default should act quickly to prevent collection efforts by contacting the Department’s Default Resolution Group.”
Here’s how to find out your student loan’s status and expert tips for getting yourself back on track if you’re already behind.
How do I know if my student loans are in default?
Within the next two weeks, the Office of Federal Student Aid will email borrowers who are in default, notifying them of their status. You can also check the status of your federal student loans by logging into your account at studentaid.gov.
If you unexpectedly receive a notice that your loans are in default, you can file an appeal, said Betsy Mayotte, president of the nonprofit Institute of Student Loan Advisors.
“Defaulted borrowers should be aware of their rights,” she said in an email. “Appealing is for situations where, for example, they think their loan defaulted in error or the loan is not valid.”
What happens if I do nothing?
You may be feeling overwhelmed by the prospect of restarting your student loan payments but experts warn that ignoring the problem will only make things worse.
If your loans become delinquent, your servicer can report the late or missed payment to the three credit bureaus and your credit score could drop. A lower credit score can make it harder and more expensive to get a mortgage, car loan or credit card.
Credit expert John Ulzheimer said the impact will vary depending on your current credit score — those with the highest credit scores could see a 100-point drop or more. The effect could be even greater if you took out multiple loans for college, because each student loan disbursement is reported to the credit bureaus.
If your loan goes from delinquent into default, the consequences become even more severe as the unpaid balance plus interest becomes due immediately:
- Your loan holder can seize your tax refund and order your employer to withhold up to 15% of your disposable pay until your defaulted loan is paid in full or the default status is resolved.
- If you’re on Social Security — and the Consumer Financial Protection Bureau estimates that there are nearly a half million borrowers ages 62 and older with defaulted loans — your loan holder can also withhold up to 15% of your benefits to repay your defaulted student loans.
- Your defaulted student loans are ineligible for income-driven repayment plans, deferment or forbearance.
- You won’t be able to get additional federal student aid.
Can I get my student loans out of default before the deadline?
If your student loans are in default, the Education Department recommends contacting the Default Resolution Group immediately. You’ll likely have a few options to get your loans out of default.
Consolidation
Consolidating your defaulted loan into a direct consolidation loan is the quickest way (besides paying it off) to get out of default, experts say.
However, there are a few things to consider. First, are you eligible for consolidation?
“If you defaulted on a direct consolidated loan, you may need at least one other eligible loan to consolidate,” Rubin said. “If you do not have any additional loans, consolidation may not be an option for you.”
Second, understand that consolidating your loan will stop collection activity but there are still consequences.
“Although consolidation is quicker, it does not remove the default from the borrower’s credit history and interest and collection costs may be added to the outstanding loan balance,” student loan expert Mark Kantrowitz told CNET in an email.
If you choose to consolidate, you’ll have the option of entering into an income-driven repayment plan or making three consecutive, on-time payments to qualify for consolidation. Rubin notes that if you agree to enroll in an IDR, the process can take up to 90 days.
Rehabilitation
If you choose rehabilitation, you’ll need to make nine consecutive on-time payments based on your income. After that, your loan is considered out of default and the default (but not the delinquencies) are removed from your credit report.
If you agree to a loan rehabilitation before wage garnishment begins, Kantrowitz said you won’t have your wages withheld while making payments. “But, if the borrower’s loans are already subject to garnishment, the nine out of 10 payments are in addition to the involuntary garnishment payments,” he added.
Rubin noted that while the deadline is quickly approaching, you should still carefully consider your goals before taking action.
“If the primary objective is to rebuild credit and eliminate the default record, rehabilitation could be the best option,” she said. “On the other hand, if the borrower needs to qualify for additional financial aid in the near future, consolidation might be the more practical choice.”
Pay off the balance
This might seem like the least likely route if you’re struggling financially but the Department of Education says you can avoid collections and negative credit reporting by paying off your debt within 65 days of notification that your loans are in default.
How do I stop my loans from defaulting?
If you’re behind on payments but your loans aren’t in default yet, you have multiple ways to rectify the situation.
You’re still eligible for lower payment options, including income-driven repayment plans, deferment and forbearance. Reach out to your servicer to discuss options, although you should expect lengthy waits. The important thing is to take action before your loans enter default, experts said.
As long as you make one full payment before your loan enters default, you can still take advantage of the delinquency options and avoid triggering the collections process, Kantrowitz said.
“If a borrower is 270-days delinquent … and they make one month’s payment before they are officially in default, that payment counts as the first payment, so they are only 240-days delinquent,” he said. “They could, in theory, just start making full monthly payments and never reach default if they are just continually eight months delinquent.”
What if I’m enrolled in the SAVE repayment plan?
If you’re enrolled in the Saving for a Valuable Education repayment plan, your payments are still on pause following a court order blocking the plan in February. Kantrowitz said payments for those loans should resume soon so consider applying for a different IDR now. You can find out what your new payment could be with the other repayment plans by using the student loan simulator at StudentAid.gov.
