What Does Student Loan Default Mean for Returning Students?

Defaulted student loans can lead to major and lasting consequences, but student loan default options are available. Being in default does not necessarily exclude you from returning to school to earn your degree, so it's important to understand what happens when student loans default and what recourse is feasible.

What Does Student Loan Default Mean?

Student loan default occurs when you break the terms of your loan and do not make any payments within a specified period of time. To fully grasp student loan default meaning, it’s key to be aware of the legal guidelines for federal student loan default.

A Plain-Language Definition for Returning Students

Federal student loan default occurs when you have not made payments on your student loans for at least 270 days. For borrowers who secure a loan through the Federal Perkins Loan Program, the student loan default definition is different, and default can occur if you do not make your scheduled payment on time.

Why Default Isn’t a Dead End

The student loan default consequences are serious and may include:

• Garnished wages
• Treasury offset
• Acceleration
• Ineligibility for additional financial aid benefits
• Negative impact on credit score

While federal student aid default can have real financial and legal ramifications for your life, student loan default help is available. Default is not necessarily the end of your journey, and loan rehabilitation programs can help you repay what you owe and start moving forward.

How Is Default Different From Being Behind on Payments?

There is a distinct difference between default vs. delinquency. Here’s what it means to be in student loan delinquency rather than default:

Understanding Delinquency: The Early Stage

Delinquency occurs immediately when you miss a student loan payment. For instance, if your payment is due on the first of the month, and you do not pay it on that day, your loan account is and will remain delinquent until you pay the balance in full. If you are unable to continue with your existing plan, you can work with your loan provider to change repayment plans or get a deferment on the loan. 

If student loan delinquency persists for 90 days or more, it will be reported to the national credit bureaus. Student loan delinquency not only has a negative impact on your credit score; it also puts you at risk of student loan default. 

How Delinquency Becomes Default After 270 Days

Delinquency turns into default if you do not make a payment on your federal student loans after 270 days. If you have defaulted student loans, the best thing to do is contact the organization that informed you of your student loan default status. You may have the opportunity to share more insight and context into why your loans are in default as well as be presented with repayment options to help you resolve the default.

What Happens When a Federal Student Loan Goes Into Default?

The federal student loan default consequences can be both immediate and long-lasting. So, what happens when you have defaulted student loans, exactly?

Your Loan Transfers to the Default Resolution Group

If you are in student loan default for more than 360 days, then your loan is transferred to the Default Resolution Group — the loan service for defaulted federal student loans. 

The Full Balance Becomes Due

The balance of defaulted student loans becomes due immediately, and most often, borrowers in default are unable to pay their balance in full at the time. As a result, they have to explore options for default support. Getting out of student loan default usually involves either loan rehabilitation or loan consolidation.

Possible Collection Actions to Be Aware Of

If you do not attempt to repay your balance in full or begin a loan rehabilitation or consolidation program, then your loan may go to collections. The following are potential financial ramifications:

• Tax refunds may be withheld.
• Wages may be garnished.
• You may not be able to purchase real estate.
• You may incur legal fees associated with the collection process, such as court costs, collection fees, and attorney's fees.

How Does Default Affect Returning Students Specifically?

More than 9.3 million student loan borrowers are in default, a number that has increased in recent years. Being in default, though, does not necessarily prevent you from returning to school, as admissions and financial aid eligibility are two entirely separate entities.

How Default Impacts Federal Financial Aid Eligibility

If you are in federal student loan default, you will be ineligible for future federal aid until you enter a loan rehabilitation or loan consolidation program. One of the most common misconceptions about loan default for returning students is that they cannot receive any additional loans but may be able to secure additional federal aid. In reality, with defaulted student loans, you are no longer eligible for Pell Grants, work-study programs, or additional federal student loans.

Why Admission and Financial Aid Are Two Separate Things

While financial aid options may be limited until you begin to rehabilitate your defaulted student loans, you are still able to apply to and enroll in a degree program. Admission is based on your academic and personal qualifications, not your financial standing.

Can You Still Go Back to College If You’re in Default?

Yes, you can still return to college and earn a degree, even if you are in student loan default. However, knowing how to resolve student loan default is integral to your journey because being in default makes you ineligible for federal financial aid that may make your education more accessible and attainable.

Separating Enrollment From Aid Eligibility

Enrollment in a degree program requires you to meet specific criteria, such as:

• Earning a high school diploma or equivalent credential
• Maintaining a specific GPA
• Completing standardized tests and submitting your scores
• Compiling and submitting additional application materials (e.g., letters of recommendation or an admissions essay)

Those requirements are entirely different from financial aid eligibility, which depends on factors such as income level or credit score. Even when in student loan delinquency or default, you may still meet all admissions criteria.

H3: Why Understanding Your Status Is the Starting Point

The key to getting out of student loan default and regaining financial aid eligibility is to understand your current loan status. If you have simply missed one or two payments, you may be delinquent on your loans but not in default. At that point, you should attempt to repay your balance in full as soon as possible. If you have been delinquent for more than 270 days, you are likely in federal student loan default. (Again, in this situation, there is student loan default help available.)

How Do You Regain Aid Eligibility After Default?

Regaining financial aid eligibility is possible, even if you are in default on your student loans. Once you’re aware of your status and ready to move forward, work closely with your loan servicer to learn more about repayment or loan rehabilitation options. 

A Brief Overview of Your Options

Your primary options are loan rehabilitation or loan consolidation. Here's what you need to know:

• Loan rehabilitation is the preferred option for most students, particularly if it is their first time with defaulted student loans. You only have one chance to take advantage of loan rehabilitation, and once completed, it removes the default status from your credit report. Loan rehabilitation entails making nine voluntary, consecutive payments during a 10-month payment period.
• Consolidation is another option to consider, and it helps you regain financial aid eligibility faster. This means you consolidate your loans into a Direct Consolidation Loan. To achieve this, you need to make three full, consecutive payments on your loan on time or agree to an income-driven repayment plan. During the consolidation process, your unpaid interest is added to your principal loan balance, which increases the overall balance.

Why Resolving Default Restores Federal Benefits

Once you are no longer in default status, all collection actions are halted. At that point, you are able to regain eligibility for federal student aid, including low-interest student loans, Pell grants, and work-study programs. 

What Should Returning Students Do Next?

Want to return to college, but your student loans are delinquent or in default? You are still able to gain admittance to a degree program, and you can begin taking steps to resolve your default and regain eligibility for federal aid.

Checking Your Status and Taking the First Step

First and foremost, check your student loan status to understand if you are delinquent or in default. Becoming aware of the collection actions in place and the possible options helps you take the first step toward getting out of student loan default.

Official Resources and Where to Get Help

If you have defaulted student loans, begin by contacting the Federal Student Aid Defaulted Loans Support Center. This official resource can provide you with further insight about the next best steps for you. Student loan policies and repayment programs can change, so keep in contact with your loan service provider and confirm all details on StudentAid.gov.

This article is designed to provide general information, not financial advice. Indiana Wesleyan University (IWU) Financial Aid can help with your specific situation.

Explore Flexible and Supportive Degree Programs at Indiana Wesleyan University

Your future has a place at Indiana Wesleyan University (IWU), and IWU Financial Aid can provide guidance regarding your specific financial situation. Keep in mind that all student loan policies and repayment programs can change, so if you are seeking to regain financial aid eligibility, you should confirm details on StudentAid.gov.