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Student Loan Default

What happens when federal or private student loans go into default, the government's collection powers that need no lawsuit, the ways out of default, and when the loans can be discharged.

Informational only - this is not legal advice. These definitions explain general legal vocabulary in plain English. They are not advice about your situation, reading them creates no attorney-client relationship, and the law differs from state to state and changes over time. For advice you can rely on, speak to a lawyer licensed in your state.

Looking for a lawyer rather than a definition? Skip to the state-by-state list of Debtor-Creditor law firms.

What it means

Federal and private student loans follow different rules, so the first step is knowing which kind each loan is (the federal loans are listed on studentaid.gov). A federal loan goes into default after a long period of missed payments set by regulation. Default makes the whole balance due at once, adds collection costs, damages credit, and ends eligibility for further federal aid and for most repayment options. It also unlocks collection powers that need no lawsuit: the government can take federal and state tax refunds and part of some federal benefits through Treasury offset, and can order an employer to withhold up to 15 percent of disposable pay through administrative wage garnishment, after written notice and a chance for a hearing. There is no statute of limitations on collecting federal student loans.

There are three main ways out of federal default. Rehabilitation requires a series of agreed, affordable on-time payments; the number of times it can be used is limited by statute, and it removes the record of the default from the credit report. Consolidation into a new Direct Consolidation Loan ends the default faster, if the borrower agrees to an income-driven plan or makes some payments first. Paying in full also ends it. Once out of default, a borrower can choose among the repayment plans then available; those plans have been changed by legislation and litigation, so check the current list on studentaid.gov rather than relying on older advice.

Some loans can be discharged: for total and permanent disability, death, a school that closed, a school that misled the borrower (borrower defense), or, for qualifying public service workers, under Public Service Loan Forgiveness. In bankruptcy, student loans are discharged only if repaying them would impose an undue hardship, proved in a separate proceeding within the case; federal guidance has made that process more available for federal loans than it once was. Private student loans are collected like other consumer debt: the lender must sue and win a judgment before it can garnish wages, and state limitation periods apply (see time-barred debt and wage garnishment).

Where this comes from

Higher Education Act of 1965, as amended: no limitation period, 20 U.S.C. § 1091a(a); administrative wage garnishment, § 1095a; rehabilitation, §§ 1078-6, 1087e; disability, death, closed-school and false-certification discharges, § 1087(a), (c); Public Service Loan Forgiveness, § 1087e(m). Regulations: 34 C.F.R. Part 685 (default, § 685.102(b); disability discharge, § 685.213; borrower defense, §§ 685.206, 685.222). Treasury offset: 31 U.S.C. §§ 3716, 3720A; 31 C.F.R. Part 285. Bankruptcy: 11 U.S.C. § 523(a)(8); Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987); U.S. Department of Justice, Guidance for Department Attorneys Regarding Student Loan Bankruptcy Litigation (November 17, 2022).

When people hire a lawyer for this

Many borrowers can leave default on their own through the Department of Education's Default Resolution Group or the loan holder, and free help is available from nonprofit credit counselors and legal aid programs; avoid companies that charge fees for applications you can file for free. See a consumer or bankruptcy lawyer if you have been sued over a private student loan, if a garnishment or offset notice arrives and you have a defense, if you may qualify for a disability or school-related discharge that has been denied, or if you are considering bankruptcy and want to know whether an undue-hardship case is realistic.

Worried about the cost? A lawyer can be hired for one part of a case only (limited-scope representation), may be paid from what a claim recovers (contingency fee), or may be free through a pro bono program or legal aid; a court can also waive its own filing fees.

Find Debtor-Creditor law firms in your state

Choose your state to see Debtor-Creditor law firms in the city where we list the most; your city may be under “other cities”, A to Z. A state marked “Bankruptcy & Debt” has no Debtor-Creditor listing yet and opens the broader page.

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Related terms

Entries on the same subject:

Other entries in the same area of law, each written from the same primary sources.

Automatic StayThe immediate, court-ordered halt to most collection activity that takes effect the moment a bankruptcy case is filed.
Bankruptcy DischargeThe court order that ends personal liability for the debts covered by a bankruptcy case - what it does, what it does not do to liens and co-signers, when it is entered, and how it can be denied or later revoked.
Bankruptcy ExemptionsThe property a person filing bankruptcy keeps - the home equity, vehicle, household goods, tools, retirement accounts and other assets the law places beyond the reach of the trustee and creditors - and the state-by-state choice of which exemption list applies.
Bankruptcy Means TestThe income calculation that decides whether a person may file a Chapter 7 case or is steered into a Chapter 13 repayment plan - a comparison of household income against the state median, followed if necessary by a line-by-line deduction of allowed expenses.
Bankruptcy Trustee and the Meeting of CreditorsThe person appointed to administer a bankruptcy case and the short, sworn examination every debtor must attend - what the trustee is looking for, who actually turns up, and what happens after.
Chapter 13 BankruptcyA reorganization bankruptcy for individuals with regular income: debts are repaid in part through a court-approved plan.
Chapter 7 BankruptcyA liquidation bankruptcy: non-exempt property may be sold to pay creditors, and qualifying debts are discharged.
Collecting a JudgmentWinning a case and being paid are two different things - the second is a separate process the winner has to start.
Non-Dischargeable DebtsThe debts a bankruptcy discharge does not erase - child and spousal support, most taxes, most student loans, criminal fines, debts from fraud or drunk-driving injuries - and the difference between those that survive automatically and those a creditor must ask the court to preserve.
Preferences and Fraudulent Transfers (Clawback)The trustee's power to undo payments and transfers made before a bankruptcy was filed - a repayment to a relative, a property signed over to a family member, a creditor paid ahead of the others - and why "I paid my brother back first" is a problem rather than a virtue.
Reaffirmation AgreementA voluntary agreement in a Chapter 7 case to remain personally liable on a debt - usually a car loan - that the discharge would otherwise wipe out, in exchange for keeping the property; what it costs, the court's role, and the alternatives of redemption and simply continuing to pay.
Small Business Bankruptcy (Chapter 11 and Subchapter V)The reorganization chapter for a business that wants to keep operating while it restructures its debts, and the streamlined subchapter Congress added for small businesses - who qualifies, how a plan is confirmed, and what happens to the owner's personal guarantees.

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Part of the LawyerLand plain-English legal glossary. Definitions are written from primary sources - statutes and court rules - and each entry states the authority it rests on, or says plainly when the doctrine is state law with no national rule.

If you cannot afford a lawyer, civil legal aid programs provide free help with many of these problems: civil legal aid programs by state.

Related free reference tools: statute of limitations for a personal-injury claim, by state, quoted from each state's official text - part of LawyerLand's legal reference tools.