Student loan debt is a burden that affects millions of Americans, with outstanding student loans in the United States surpassing $1.7 trillion as of 2025. While many borrowers work diligently to manage their repayments, a significant number fall behind and ultimately default on their loans. In fact, nearly 10% of federal student loan borrowers are in default, with the rate rising as high as 25% for those who have entered repayment in the last 20 years.
Defaulting on student loans has long-term financial and personal consequences, yet it’s often preventable with the right knowledge and proactive strategies. In this article, we’ll explore the real costs of defaulting on student loans and provide actionable advice on how to avoid this outcome.
What Does It Mean to Default on a Student Loan?
Student loan default occurs when a borrower fails to repay their loan according to the terms of their agreement. For federal student loans, a borrower is considered in default after missing 270 days (about nine months) of payments. Private loan servicers may have their own timelines, but the result is the same: the borrower is unable to meet repayment obligations.
Once a loan is in default, the borrower loses access to many benefits, and the loan may be turned over to a collections agency. Federal student loan holders can even garnish wages or seize tax refunds to recover the debt.
While the default rate is concerning, many of these defaults are avoidable with careful planning and understanding of available repayment options.
The Consequences of Defaulting on Student Loans
The impact of defaulting on student loans extends far beyond the immediate loss of creditworthiness. Here’s a breakdown of the significant costs and repercussions:
1. Damage to Credit Score
One of the most immediate consequences of default is the damage to a borrower’s credit score. Defaulting on a loan is a major red flag for credit bureaus, and it can cause a dramatic drop in your credit score. This makes it harder to qualify for future loans or credit cards, and if you do qualify, you’ll likely face higher interest rates. A damaged credit score can affect everything from car loans to mortgages, and it can take years to rebuild.
2. Wage Garnishment and Tax Refund Seizure
For federal student loans, the government has the authority to garnish wages directly from your paycheck. This means that a portion of your income will be deducted and sent directly to the Department of Education until your defaulted loan is repaid. In addition, the IRS can seize your tax refunds to cover the outstanding balance of your student loans. These actions can disrupt your financial stability and make it even more difficult to manage daily expenses.
3. Loss of Repayment Flexibility
Defaulting on a student loan means you lose access to various repayment options, including income-driven repayment plans, which adjust your monthly payments based on your income. Income-driven plans can provide significant relief, particularly for borrowers who are struggling with a large debt load or who are underemployed. Defaulting on a loan makes you ineligible for these programs, leaving you with fewer options for managing your payments.
4. Collection Fees and Legal Action
Once your loan is sent to collections, the lender or loan servicer can add collection fees on top of your original debt, significantly increasing the total amount you owe. These fees can compound the financial strain caused by default. In some cases, borrowers may also face legal action, leading to lawsuits and additional financial burdens.
5. Impact on Financial Security and Retirement
Defaulting on student loans can affect your long-term financial security. Not only does it lower your credit score, but it also makes it more difficult to secure loans for major life milestones, such as purchasing a home or car. Over time, this can impact your ability to save for retirement, putting your future financial stability at risk.
Why Are So Many Borrowers Defaulting?
The issue of student loan defaults is complex and rooted in several key factors:
1. Rising Tuition Costs
The skyrocketing cost of education has led many students to borrow more than ever before. According to the College Board, the average cost of attending a four-year public college has increased by over 200% since 1990, far outpacing inflation. Students often take on large amounts of debt to cover tuition, fees, and living expenses, but many graduate with low-paying jobs or struggle to find work, making it difficult to repay the loans.
2. Underemployment and Wage Stagnation
Even those who manage to graduate are not always entering well-paying jobs. Many recent graduates struggle with underemployment, working in part-time positions or jobs that don’t require a college degree. As wages remain stagnant for many entry-level positions, these borrowers often face difficulty managing student loan payments alongside other living expenses.
3. Lack of Financial Literacy
Many students graduate without a solid understanding of loan repayment options or personal finance. This knowledge gap means that students may not fully understand their repayment terms or the consequences of missing payments. A lack of financial literacy can lead to poor decisions, such as missing payment deadlines or failing to seek assistance when experiencing financial hardship.
4. Complex Repayment Systems
Navigating the repayment system can be confusing for borrowers, particularly when there are multiple loan servicers or complex repayment plans to choose from. Without proper guidance, many borrowers inadvertently fall behind on payments, putting them at risk of default. The bureaucratic nature of student loan servicing can leave borrowers feeling overwhelmed and uncertain about the best course of action.
How to Avoid Defaulting on Student Loans
Fortunately, student loan defaults are not inevitable. There are several steps borrowers can take to avoid falling behind on their payments and to stay on track financially:
1. Explore Income-Driven Repayment Plans
If you’re struggling to make your monthly payments, consider enrolling in an income-driven repayment plan. These plans base your monthly payments on your income and family size, which can lower your payments significantly. Even if you’re facing financial difficulties, these plans can help you avoid default and keep you in good standing.
2. Consider Deferment or Forbearance
If you’re temporarily unable to make payments due to financial hardship, consider requesting a deferment or forbearance. These options allow you to temporarily pause payments without going into default. However, keep in mind that interest may still accrue during this time, especially on unsubsidized loans, which can increase the total amount you owe.
3. Stay in Communication with Your Loan Servicer
One of the most important steps in avoiding default is maintaining open communication with your loan servicer. If you’re struggling to make payments, contact your servicer immediately to discuss your options. They may be able to help you navigate alternative repayment plans or provide guidance on the next steps.
4. Consolidate or Refinance Loans
If you have multiple federal or private loans, consolidation or refinancing might be an option. Consolidating loans into one federal loan can simplify your payments, while refinancing could potentially lower your interest rate if you have a strong credit score. Be sure to understand the implications of these options, especially when it comes to losing federal protections with refinancing.
5. Seek Professional Financial Help
If you’re unsure about your options or need assistance, consider seeking advice from a financial advisor or a student loan counselor. Nonprofit agencies offer free or low-cost counseling services that can help you develop a strategy for repaying your loans and avoiding default.
The Bottom Line: Preventing Student Loan Default
Defaulting on student loans can have devastating long-term effects, from damaged credit scores to garnished wages and tax refunds. However, with the right strategies and a proactive approach, you can avoid default and manage your debt successfully.
By exploring repayment options, staying informed, and seeking help when needed, borrowers can reduce the risk of default and set themselves on a path toward financial stability.