More Than 9 Million Student Loan Borrowers Are in Default — What Are the Options?
Student loan debt has been a thorny issue for years, but there's a new facet about to make it even more cutting in the public discourse.
The student loan defaults have now reached 14% of the entire $1.64 trillion federally managed student loan portfolio, according to data from Federal Student Aid. That amounts to over 9 million student loan borrowers. Depending on how far the collection process has progressed, borrowers may be able to rehabilitate or consolidate their loans, enter a repayment agreement, challenge a collection action or take additional actions. Here are five facets to know heading into your plan to pay it off.
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1. Your Paycheck Is Fair Game
Federal student loans generally enter default after at least 270 days without required payments. Once a borrower has gone more than 360 days without paying and doesn't resolve the default, involuntary collection can begin. However, the Department of Education paused involuntary student loan collections in January 2026, and the pause remained in effect as of late September.
According to Federal Student Aid, the government can garnish up to 15% of a borrower's disposable pay. It can also use something known as a “Treasury offset” to claim the money it’s owed from various federal payments, including income tax refunds and certain federal benefits.
The U.S. Treasury Department said that the government can’t simply step in and confiscate your wages or benefits without giving you notice first. The notice will give you time to either pay the debt, reach some type of payment agreement or dispute what you owe.
2. Loan Rehabilitation Can Remove the Default
Loan rehabilitation can be a difficult option because it can take longer than some other options. Successfully completing it does remove the default status from the loan, so for some borrowers, it can be worth the extra effort.
The standard rehabilitation payment generally equals 15% of annual discretionary income divided by 12, according to Federal Student Aid. If that’s too difficult to swing financially, borrowers may be able to request an alternative payment plan more suited to their specific financial circumstances. Most Direct Loan and Federal Family Education Loan borrowers must make nine on-time voluntary payments within 10 consecutive months.
Collection stops once rehabilitation is complete. At that point, the borrower again becomes eligible for federal student aid.
Although earlier late payments can remain, after rehabilitation, the Department of Education also asks credit reporting agencies to remove the record of the default.
3. Consolidation Can Be a Quicker Option
Federal Student Aid's default guidelines said borrowers can consolidate eligible defaulted loans into a new Direct Consolidation Loan. This offers another path out of default and may move more quickly than rehabilitation.
Depending on the circumstances, borrowers may have to agree to an eligible repayment plan or first make satisfactory repayment arrangements.
Consolidation comes with a big trade-off. If you use it to get a loan out of default faster, the default can remain on your credit history. Interest and certain collection costs may also continue to pile up until the debt is paid.
4. A Repayment Agreement May Stop Collections
To prevent Treasury offset or wage garnishment, borrowers can enter repayment agreements after receiving collection notices. Per Federal Student Aid, however, you’ll have to make the first payment within 65 days of a Treasury offset notice to avoid offset and within 30 days of a wage garnishment notice to avoid garnishment.
Borrowers who believe the debt or collection action is wrong also have hearing rights. Those deadlines are listed in the collection notice.
5. Don't Ignore a Default Notice
If you’re looking for more help, the Department of Education and Treasury announced a new Defaulted Loans Support Center on Sept. 30, designed to help borrowers understand their options and return to repayment. Borrowers can use the new online portal to apply for rehabilitation or consolidation, make payments and review other repayment options. Although default can trigger a series of undesirable outcomes, there are still options available for borrowers who act promptly and respond to relevant notices to help stave off the worst effects.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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