What happens to you when you default on student loans largely depends on whether you have federally-backed or private loans.
When you default on federally-backed student loans
Most student loans are backed by the federal government. These include Stafford and Perkins loans, PLUS, Parent PLUS, FFEL, and most types of consolidation loans. Federally-backed lenders have potent powers of collection on these loans if you default.
Federal student loan collectors seize tax refunds, garnish wages, and do not need to sue you first. Federal loan default can also result in astronomical collection fees. You can also be denied new student loans and receive reduced federal benefits, including Social Security. In addition, federal student lenders report default to credit bureaus without fail. Federal loan default invariably results in lower credit score.
When you default on student loans with private lenders
Unlike federally-backed lenders, private lenders must sue you when you default on student loans. Private student loan collection agents are also typically more aggressive than those hired by federally-backed lenders. While most private lenders report to credit bureaus monthly, some report every three or four months. If you can catch up on a loan with a private lender, in many cases you can avoid negative reporting to credit bureaus.
On the other hand, if many months pass once you default, then your loan may be sold to an even more aggressive debt buyer. Debt buyers will sue you to preserve the right to garnish wages or bank accounts.
If it has been years since you defaulted, then the statute of limitations on the loan may prevent the lender from suing you. Yet this does not mean that you do not still owe the debt. The lender may continue other collection attempts, including delinquent item credit bureau reporting.
Your options when you default on student loans
First, determine whether you have federally-backed or private student loans. Go to the National Student Loan Data System to learn who owns your loan, who services it, and your loan balance and interest rate.
Federal loans. If you have federally-backed student loans, you have many options available to you. Forbearance and deferment allow you to suspend payments, especially if your income does not allow you to make the monthly payment.
If forbearance or deferment are not available to you, there are different types of income-based repayment programs. Call your lender and apply for one of these programs. The earlier after default you apply, the more options may be available to you.
Private loans. If you have private student loans, your options are more limited. Unlike with federal lenders, however, you may be able to settle your debt for less than is owed, especially if you are able to offer a large lump sum. Settlement can be difficult, however, and many lenders do not accept them. Your entire financial profile comes into play in these negotiations.
Some private lenders have internal programs that mirror federal IBR programs, but many do not. Your best bet when you default on these loans is to stay in touch with the lender and attempt to rehabilitate the loan by working out a sustainable repayment plan.