Navigating Student Loan Default: Collections, Forbearance, and Options

The complexities surrounding student loan repayment can be overwhelming. With the resumption of collection activities on defaulted federal student loans, understanding your options and responsibilities is more critical than ever. This article provides a comprehensive overview of student loan default, collection processes, forbearance options, and strategies for managing and avoiding default.

Understanding Student Loan Default

A student loan becomes delinquent when a borrower doesn’t make a payment 90 days after its due date. When you fall behind on a loan by 270 days, the loan appears on your credit report as being in default. Defaulting on student loans carries significant consequences that can negatively impact your financial future. It's a serious matter that deserves careful consideration. Before applying for student loans, it’s wise to learn more about the consequences of default, how to avoid it, and, if you’re already in default, how to take steps to address it. You are responsible for repaying your student loans even if you do not graduate, have trouble finding a job after graduation, or just didn’t like your school.

Consequences of Default

Defaulting on a student loan can trigger a cascade of adverse effects:

Collection Agency Involvement: Your loans may be turned over to a collection agency.
Financial Penalties: You’ll be liable for the costs associated with collecting your loan, including court costs and attorney fees.
Legal Action: You can be sued for the entire amount of your loan.
Wage Garnishment: Your wages may be garnished.
Tax Refund Interception: Your federal and state income tax refunds may be intercepted.
Social Security Offset: The federal government may withhold part of your Social Security benefit payments.
Credit Score Damage: Your defaulted loans will appear on your credit history for up to 7 years after the default claim is paid, making it difficult for you to obtain an auto loan, mortgage, or even credit cards. Those who are delinquent on their student loans might see a drop of one hundred points or more to their credit score.
Loss of Federal Aid Eligibility: You won’t receive any more federal financial aid until you repay the loan in full or make arrangements to repay what you already owe and make at least six consecutive, on-time, monthly payments. You will also be ineligible for assistance under most federal benefit programs.
Ineligibility for Deferments: You’ll be ineligible for deferments.
Loss of Interest Benefits: Subsidized interest benefits will be denied.
Professional License Restrictions: You may not be able to renew a professional license you hold.
Military Enlistment Restrictions: You may be prohibited from enlisting in the Armed Forces.
Continued Debt Obligation: And of course, you will still owe the full amount of your loan.

In addition to ongoing credit score damage and hefty collection fees, the federal government also wields vast extra-judicial powers to collect student debt, including garnishing wages and seizing Social Security payments and tax refunds that are targeted to households with very low incomes, including the Child Tax Credit and the Earned Income Tax Credit. The federal government, states, and colleges can also impose a series of harsh penalties that are unrelated to collecting payments, including restricting access to further federal aid, withholding a student’s academic transcripts, and suspending professional and even driver’s licenses.

The State of Student Loan Repayment in 2025

The federal student loan repayment system is dysfunctional and needs reform.

As of March 7, 2025, Education Department data showed that 9.2 million borrowers were late on their payments, with 4.2 million of those more than 90 days late. These borrowers are at especially high risk of entering default, which happens once a borrower has been late on payments for more than 270 days. Borrowers have limited access to assistance in getting back on track. The Education Department has been gutted, with hundreds of experts now gone from the Office of Federal Student Aid, which administers the federal student loan program and oversees the federal government’s contracted loan servicers. These cuts have eroded the Department’s ability to identify and correct servicing issues and to properly communicate with borrowers.

Currently, almost 1.9 million borrowers have been unable to even begin repayment because of a processing pause put in place by the previous administration. Since August 2024, the Department has not processed applications for enrollment in any repayment plan such as Income-Based Repayment, Income-Contingent Repayment, or PAYE.

Resumption of Collections

The Department of Education today announced its Office of Federal Student Aid (FSA) will resume collections of its defaulted federal student loan portfolio on Monday, May 5th, 2025. The Department has not collected on defaulted loans since March 2020. Beginning May 5, the department will begin involuntary collection through the Treasury Department’s offset program. Later this summer, FSA will send required notices beginning administrative wage garnishment. The Department will also authorize guaranty agencies that they may begin involuntary collections activities on loans under the Federal Family Education Loan Program. All FSA collection activities are required under the Higher Education Act and conducted only after student and parent borrowers have been provided sufficient notice and opportunity to repay their loans under the law.

Forbearance: A Temporary Pause

Student loan forbearance is a temporary pause on your student loan payments granted to borrowers who are experiencing financial difficulties. Forbearance is not an option for borrowers whose student loans are in default.

During forbearance, the lender allows you to postpone or reduce your payments, but the interest charges continue to accrue. You must continue paying the interest charges during the forbearance period. Forbearances are typically granted in 12-month intervals for up to three years. Forbearances are not granted automatically. You must submit an application and provide documentation to support your request for a deferment. Forbearances are granted at the lender’s discretion, usually in cases of extreme financial hardship or other unusual circumstances when the borrower does not qualify for a deferment. Do not stop making payments on your student loans until after you are notified that your forbearance has been granted.

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Update from Department of Education Spring 2022: The Department of Education has extended its deadline for colleges and universities to assign Perkins Loans that are over two years delinquent by one year - to June 30, 2023

Approximately 8 million borrowers who were enrolled in the SAVE Plan continue to sit in the limbo of administrative forbearance while litigation drags on.

Income-Driven Repayment (IDR) Plans

These challenges have jeopardized borrowers’ ability to enroll in income-driven repayment (IDR) plans, which offer more affordable monthly payments to help borrowers stay current on their payments and avoid delinquency or default. Even before the applications were shut down, borrowers were facing long delays between applying for a plan and being enrolled in one, with the processing backlog growing by the day. Borrowers have fewer resources than ever to navigate their repayment options, and those options are ever shifting. For many borrowers, this is likely to mean default.

Policymakers must ensure borrowers have access to income-driven repayment plans. Without these plans, borrowers who simply cannot afford their payments have little recourse. These plans are the key safety net that enables borrowers to stay active in repayment even in times of financial hardship. Any new plans should retain the basic design principles that have worked for two decades: monthly payments that are truly affordable and that scale based on a borrower’s income, paired with a “light at the end of the tunnel” that discharges any debt that remains after a set number of income-based monthly payments.

FSA will also launch an enhanced Income-Driven Repayment (IDR) process, simplifying the time that it will take borrowers to enroll in IDR plans and eliminating the need for borrowers to recertify their income every year.

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Strategies for Preventing Default

Preventing default requires proactive management and informed decision-making:

Borrow Wisely: Borrow as little as possible. Default rates increase with overborrowing. If your total debt will be more than twice your expected starting salary, you are borrowing too much and should consider attending a less expensive college.
Understand Your Loans: Make sure you understand your options and responsibilities before taking out a loan.
Stay Organized: Prepare a checklist of all your loans, including the name and phone number of the lender, the type of loan, the amount of the loan, the interest rate, and especially any due dates or deadlines.
Make Timely Payments: Make your payments on time.
Communicate with Your Lender: Notify your lender or servicer promptly of any changes that may affect the repayment of your loan, such as change of address, graduation or termination of studies, leaves of absence and transfers to another school.
Explore Deferment or Forbearance: If you encounter temporary financial difficulties, consider applying for a deferment or forbearance on your loans. Ask your lender about these options while you are still making payments, before you default on your loan.
Consider Alternative Repayment Plans: If you are having trouble making payments due to a more permanent income deficit, your lender may be able to suggest alternate repayment options, such as extended repayment, graduated repayment, income sensitive repayment, income contingent repayment and income-based repayment.
Consolidation Loan: Consider using a consolidation loan to combine all of your educational loans into one big loan.
Prioritize Federal Loans: If you have both federal and private education loans and can afford to make the required payments on only one loan, try to avoid defaulting on the federal loans. The federal loans have more flexible repayment options and harsher penalties for default.

Two options available for postponing repayment of your student loans are deferments and forbearances. If you are thinking about defaulting on your student loans, ask the lender whether you are eligible for a deferment or forbearance before you default.

Deferments

During deferment, the lender allows you to postpone repaying the principal of your loan for a specific period of time. Most federal loan programs allow students to defer their loans while they are in school at least half time. For Perkins Loans and Subsidized Stafford Loans, no interest accrues during the deferment period because the federal government pays the interest. Students can postpone the interest payments on such loans by capitalizing the interest, which increases the size of the loan. Deferments are commonly granted for students who are enrolled in undergraduate or graduate school, disabled students who are participating in a rehabilitation training program, unemployment and economic hardship. These deferments are for the FFELP and FDSLP loans, not the Perkins loan. Deferments are not granted automatically. You must submit an application and provide documentation to support your request for a deferment. Do not stop making payments on your student loans until after you are notified that your deferment has been granted.

Getting Out of Default

Policymakers should make it easier for those already in default to get out of it.

To get out of default, you need to make arrangements with your servicer or lender to repay the loan. Once you have made six consecutive full voluntary on-time payments, you will be eligible for additional Title IV aid. On-time is defined as within 15 days of the due date. For loan rehabilitation, the payments must be “reasonable and affordable”. This is determined by the guarantee agency, and will consider the borrower’s (and his/her spouse’s) disposable income and financial circumstances. Also, if you are seeking rehabilitation and your wages are subject to a garnishment order, sometimes the guarantee agency will be willing to accept the higher of the rehabilitation amount or the wage garnishment, as opposed to the sum. Also, if the default is very recent and the borrower brings the delinquency under 270 days (the definition of default for federal education loans) within the 90-day period, before the lender has filed a default claim, they can cure the default. It may also be possible to cure the default by consolidating the delinquent loan before the lender has filed for a default claim. Since the consolidation loan is a new loan, it effectively wipes the slate clean.

Dealing with Collection Agencies

The collection agency’s costs are added to the amount due, and the borrower is required to repay them in addition to the amount due on the loan. Federal regulations concerning campus-based loan programs, such as the Perkins Loan, suggest that collection costs may not reasonably exceed a certain percentage of the principal, interest and late charges collected on the loan, plus any court costs, for collection efforts. For loans held by the US Department of Education (e.g., Federal Direct Stafford Loans), the department assesses collection costs at a rate of 25% of the outstanding principal and interest due on the loan (or 20% of the payment). If you work out a payment schedule within 60 days of default, some collection agencies will waive or reduce the collection fee. Overall, it appears that collection costs can legally be as high as 40%, perhaps even higher. If you think the collection costs are excessive, you can ask the collection agency to provide a detailed itemization of the actual costs incurred in collecting the loan. Be aware of the legal and illegal debt collection practices and your rights under the law. In particular, you may be able to stop the phone calls and letters by writing a letter to the collection agency and telling them to stop contacting you. Note that you are still obligated to repay the debt even if the collection agency stops contacting you about it.

Wage Garnishment

The federal government and guarantee agencies can garnish your wages administratively. This is in contrast with lenders of private student loans, who must obtain a court order to garnish your wages. If a guarantee agency or the US Department of Education will be garnishing your wages, they are required to provide you with 30 days notice and to offer you the opportunity for a hearing. Borrowers should always demand proof of the existence of the debt and the amount of the debt, such as a copy of the original promissory note. Guarantee agencies often have very sloppy records and may not be able to prove the existence of the debt. Borrowers should also ask for and review a complete copy of the repayment history on the loan, as there may be errors where payments were not properly credited to the account or where payments are missing. The Higher Education Act does not permit wage garnishment of borrowers who have been laid off or fired from their jobs until they have been employed for at least 12 continuous months. Low-income borrowers should also verify the accuracy of the wage garnishment amount. Most guarantee agencies set the wage garnishment amount at 15% of disposable pay, but the regulations and statute require that the borrower be left with weekly earnings after the garnishment of at least 30 times the Federal minimum wage.

Tax Refund Offset

If you have defaulted on your federal education loans, the federal government or a state guarantee agency may intercept your federal and state income tax refunds (or other payments from the federal government) and offset them to satisfy the debt.

Private Student Loans

While federal education loans define a default as occurring after 270 days of non-payment, for private student loans a loan is considered in default after 120 days of non-payment. Private student loans also have fewer tools for averting default. For example, the forbearance period on a private student loan is usually no more than a year, in six month increments. Private student loans cannot attach federal and state income tax refunds or prevent the renewal of state licenses, but they can sue under state loan to garnishee wages to repay a defaulted debt. They are also exempted from discharge by bankruptcy unless the borrower files an undue hardship petition that is granted by the court.

Resources for Borrowers

StudentAid.gov: For loan status, servicer information, and detailed information on getting out of default. Borrowers need to access their studentaid.gov account to find the status of a student loan and their loan servicer information.
Financial Aid Office: The financial aid office at your school should be able to tell you the name, address and telephone number of your lender and can also provide you with help and advice about repayment problems.
Loan Servicer: For information about your options, contact the servicer of the loan and/or the original lender or the current holder of the loan.
Default Resolution Group: The US Department of Education Debt Collection Service is now know as the Default Resolution Group.

A Dysfunctional System

Dysfunction in the federal government continues to keep federal student loan borrowers in a state of perpetual chaos. At the start of the pandemic pause in March 2020, 8.6 million borrowers were in default. In addition to the millions of borrowers who have remained in default since before the pandemic, millions more borrowers are behind on their payments and at high risk of entering default within the year.

The Department must provide sufficient and clear direction and resources to loan servicers to implement changes to plan options and to process applications in a timely manner. Servicers must also be held accountable for properly managing borrower accounts and providing expedient customer support. Of course, the Department and its contracted loan servicers need sufficient resources to do all this. The system cannot function without proper funding and staffing.

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