When a borrower stops making payments on student loans for a period of time, they could end up in default. And in some cases, lenders may send defaulted loans onto collections.
If your student loans end up in collections, it can have some bad financial consequences. Your credit score may be damaged, and sometimes your wages may be garnished. While it can be very stressful, there are steps you can take to fix the problem.
Before we dive in, it’s important for you to know this is an incredibly complex topic. We’re going to try to break it down the best we can, but full disclosure: The information we’re sharing here is general in nature and does not take into account your specific objectives, financial situation, and needs; it should not be considered advice. SoFi recommends you speak to a professional about your unique situation so you can make sure you make the right decision for your circumstances.
💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.
How Student Loans End up in Collections
Student loans don’t go away until you’ve paid them off. If you haven’t been paying off your student loans, your debt can go into default, because you are failing to fulfill your contractual obligation to repay your loan.
Americans owe more than $1.7 trillion in student loan debt as of the second quarter of 2023. When you consider that the average federal student loan debt for the class of 2023 was over $37,574, it’s no surprise that some have trouble keeping up with it. In fact, an average of 7% of student loans are in default at any given time.
Delinquent Federal Student Loans
The first day after missing a payment on a federal student loan, the loan becomes delinquent. The loan will remain delinquent until the overdue balance is paid, or the borrower makes alternate arrangements such as applying for deferment or forbearance or switching their payment plan.
After 90 days of missing payments for federal student loans, the loan servicer will report the late payments to credit bureaus, which could negatively impact the borrower’s credit score.
Recommended: Defaulting on Student Loans: What You Should Know
Federal Student Loans in Default
For federal loans, you typically go into default after you haven’t paid your loan bill for nine months or 270 days.
When in default, the entire balance of the loan comes due. But just because a loan is in default, doesn’t mean it automatically goes to a collections agency.
At this point, you may have the opportunity to make arrangements with your loan servicer. For example, your lender may help you tailor solutions that lower your monthly bill to make payments more manageable for you.
However, if you don’t come to an agreement, your lender can send your debt to a collections agency that will collect it for them.
No federal loans went into default during the Covid-19 student loan pause. That’s changing as of September 2023, but thanks to the one-time Fresh Start program, borrowers who have defaulted loans can take steps to have their default status removed from their credit reports and restart payments with no penalties.
Private Student Loans in Default
The timeframe may vary for private loans depending on the terms and conditions of the loan. Generally speaking, private student loans may go into default after 90 days of missed payments. You should read your loan agreement for more information on when your loan provider will send your defaulted loans to collections.
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What Does It Mean to Have a Loan Sent to Collection?
Once your debt is sent to a collections agency, that agency will do everything they can to get you to pay. Unfortunately, on top of collecting the debt, collections agencies typically charge fees, for which you’ll also be responsible.
Once your debt is in collections, the collections agency might try to work out a repayment plan with you as a first step. If you continue to not pay, the agency can then take actions to recoup the money, such as trying to garnish your wages.
Garnishment means the agency can take a certain amount from each paycheck and apply it toward your debt — in the case of federal student loans, it’s not more than 15%. For federal student loans, lenders are not required to take the borrower to court before garnishing wages.
Private student loans function differently. They are not subject to the same special regulation as federal student loans. Private lenders interested in garnishing wages must follow garnishment rules laid out for private debt. In this case, the lender is required to take the borrower to court and obtain a judgment in their favor before any wages can be garnished.
Recommended: What Happens If You Just Stop Paying Your Student Loans
What Happens When Your Loans Go into Default and Collections?
Some other not-so-great things can happen when your loans go into default and collections.
First, if you have defaulted on federal student loans, you may lose access to various federal loan repayment plans and forbearance or deferment on federal loans. These programs are important tools designed to make it easier for you to pay off your loans. Loan forgiveness is offered to those who have jobs in certain government, healthcare, and nonprofit sectors. Forbearance allows you to temporarily stop making student loan payments or reduce the amount you pay each month.
Your credit score may take a hit as well. With both private and federal student loans, the lender or the collections agency will report the late payments to the three major credit bureaus, and that might then lower your credit score.
A low credit score might cost you down the line, making it difficult to secure future loans at reasonable interest rates, should you want to buy a house or a car, for example. It may even mean you won’t qualify for a loan at all. Avoiding default might help you maintain these important financial tools.
Recommended: Student Loan Deferment vs Forbearance: What’s The Difference?
How to Get Your Loans Out of Default
The best thing you can do to avoid your student loans going into default and being sent collections is to pay your bills on time. And if you think you’re going to miss a payment, reach out to your loan provider to see if they’ll offer support.
But if you’ve defaulted, there may still be options for you to recover.
Options for Federal Student Loans
If you have federal student loans, you can try to rehabilitate your student loan in collections. Here’s how the program works: After you’ve made three consecutive on-time, voluntary, full payments on a defaulted federal loan, you can consolidate your federal loans.
The new direct loan pays off the old loans in full and consolidates them. Once you have made nine out of 10 consecutive, voluntary, on-time payments to this new loan, the loan may be rehabilitated and the default may be removed from your record. With a Direct Consolidation Loan, your eligible federal loans will be combined into one loan with a fixed interest rate — and the new rate will be the weighted average of the rates on the loans being consolidated (rounded up to the nearest one-eighth of 1%).
Options for Private Student Loans
When it comes to private student loans, private lenders may or may not offer borrowers the opportunity to rehabilitate their loans. You should contact your lender and ask what you can do to get your loan out of default. Sometimes borrowers who have rehabilitated a private student loan may ask to have the default removed from their credit report, but there is no guarantee that it will be removed.
In some circumstances, the statute of limitations on debt may be a consideration for private student loan debt. This is a legal time frame in which a creditor is allowed to collect on the debt, and it is determined by state law. In the case that the statute of limitations on private student loan debt has been met, entering into a rehabilitation plan may restart the limitations period.
Additionally, it’s important to note that some lenders may charge off private student loans that are delinquent for 120 days, or a set period of time, which may vary from lender to lender. When a lender charges off a loan, it means they have written off the loan as a loss and close the account. They typically sell your loan to a debt buyer or collections agency. But you are still legally obligated to pay off the loan. If the debt is charged off, the lender may not be willing to work with the borrower.
What to Do If Your Student Loan Goes to Collections
If you do find yourself in the unfortunate situation of having debt in collections, there might be steps you can take.
First, you could talk to your collections agency. It might seem scary, and it may be tempting to ignore their calls and letters, but doing so isn’t going to make them stop. Remember: Collections agencies want you to pay. It’s in their best interest for you to ultimately pay back your loan. In many ways, this is a situation in which the ball is in your court.
When you talk to them, the collections agency might offer payment options tailored to your individual circumstances, depending on if you’re employed and how much money you earn.
They might offer solutions such as allowing you to pay a discounted lump sum, or they might set up a manageable monthly payment plan if you don’t have a lot of income.
Having your loans in default or collections might have serious effects on your credit and your financial stability. If you’re afraid of defaulting on your loans, or if you already have, consider taking action as fast as you can. Taking control of the situation could help keep it from getting worse.
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The Takeaway
In an ideal world, the best way to avoid going into student loan default is to make payments on time and in full. But if you have competing financial priorities, it may be difficult for you to pay your loans on time.
If your student loans end up in collections, it may damage your credit score, and with federal loans, your wages may be garnished. But there are steps you can take to rehabilitate your defaulted loans, depending on whether you have private or federal loans.
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.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
This article is not intended to be legal advice. Please consult an attorney for advice.
SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
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SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
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