Millions of borrowers with defaulted federal student loans may soon be facing significant credit reporting and collections consequences, as an extension on paused actions against defaulted borrowers is set to expire. That extension, which will end in early January, is the final period of relief before draconian collections efforts may resume.

Borrowers in default on their student loans still have options to cure their defaulted status and return to good standing. Doing so may allow them to access affordable payment plans and potentially get on track for eventual student loan forgiveness. But remaining in default could have dire consequences including credit damage, substantial fees and penalties, and so-called “involuntary” administrative collections efforts, which can be devastating.

Here’s what borrowers need to know, and what their options might look like.

Defaulted Federal Student Loans Have Been Shielded From Negative Credit Reporting And Collections

For nearly five years now, borrowers in default on their federal student loans have been protected from the consequences of remaining in default. The Covid-19 forbearance, which began in March 2020, halted all collections efforts against borrowers with government-owned federal student loans, and suspended interest accrual. Those protections were eventually expanded to include FFEL-program loans. Congress originally envisioned six months of relief when it passed enabling legislation during the early months of the pandemic. But President Trump, and subsequently President Biden, issued multiple short-term extensions.

After three and a half years, the forbearance finally ended, and most borrowers returned to repayment in the fall of 2023. But the Biden administration then launched two simultaneous programs designed to ease the transition into repayment and provide borrowers in default with a pathway back into good standing. The Fresh Start initiative extended the pause on collections efforts on defaulted federal student loans for another full year, eliminated negative credit reporting, and gave borrowers an option to get their loans out of default. The “on-ramp” initiative, meanwhile, prevented borrowers who started missing payments on their student loans from falling into default by converting any months of missed payments into a retroactive forbearance. Both programs lasted 12 months after the Covid forbearance had ended.

Both Fresh Start and the on-ramp initiative ended this fall. But shortly thereafter, the Biden administration announced that it would extend the pause on collections yet again until the end of this year. Administration officials now anticipate collections efforts resuming against defaulted student loan borrowers in early 2025 — potentially as soon as January. The incoming Trump administration has given no indication that there will be any further extension.

Consequences Of Remaining In Default On Federal Student Loans Can Be Severe

Borrowers who remain in default on their federal student loans may soon be facing significant consequences.

Negative Credit Reporting For Defaulted Student Loans

While most federal student loan defaults are not currently being reported to the national credit bureaus, that may change quite soon. Defaulted federal student loans can tank someone’s credit score and make it difficult or impossible to get approved for an apartment, car loan, or mortgage. Federal student loan defaults can also come up in employment background checks, particularly for individuals pursuing careers in the financial services sector, the federal government, or law. And it can disqualify borrowers from receiving new federal student aid if they want to return to school.

Collections Fees On Defaulted Student Loans

Collections fees and penalties can be assessed on defaulted federal student loans. In some cases, these fees can be as high as nearly 25% of the entire balance. So if you have a federal student loan balance of $40,000 that is in default, the loan holder could potentially add on another $10,000 in fees, bringing the total balance to $50,000.

Administrative Collections

Unlike private lenders, the federal government and federally-backed FFEL loan holders have powerful collections tools that allow them to force borrowers to pay “administratively” — meaning, without going through the process of filing a lawsuit, obtaining a judgment, and getting a court order. Administrative collections activities include wage garnishment, which can siphon off 15% or more of your paycheck, and Treasury Offset, which allows the government to intercept federal tax refunds and other federal income streams and offset federal benefits such as a portion of Social Security.

Litigation

In a small number of cases, the government and federal lenders may pursue litigation against borrowers in federal or state court. This typically occurs when administrative collections efforts are limited or not fruitful, and officials believe the borrower may have additional income or assets that go beyond what the government can collect through administrative wage garnishment or Treasury Offset. By filing a lawsuit, the government can obtain a judgment which may then allow for property liens, bank account attachments, and other asset seizures.

Borrowers Have Options To Get Federal Student Loans Out Of Default And On Track For Student Loan Forgiveness

The good news for borrowers is that there may be options to get their federal student loans out of default and back into good standing again. This can allow borrowers to pursue programs like income-driven repayment, which can provide affordable payments and eventual student loan forgiveness; Public Service Loan Forgiveness, Teacher Loan Forgiveness, and other profession-based student loan forgiveness programs; and start the process of repairing their credit.

Fresh Start is no longer an option, as that program ended last fall. However, borrowers may be able to utilize two other default resolution programs.

Rehabilitation For Federal Student Loans

Rehabilitation is a program that allows borrowers to make repayment arrangements while in default on their federal student loans. Borrowers must enter into an agreement with their defaulted loan holder to make at least nine timely monthly payments over a 10-month period. Payments would be based on the borrower’s income. After the borrower completes all of their obligations under the rehabilitation program, their student loans should be restored to good standing, and the prior record of default should be deleted from their credit history (although the record of missed payments may remain).

“If you rehabilitate a defaulted loan and then default on that loan again, you can’t rehabilitate it a second time,” warns the Education Department in published guidance. “Rehabilitation is a one-time opportunity.”

Consolidation For Federal Student Loans

Another potential option for borrowers is Direct loan consolidation, which allows borrowers to combine existing federal student loans into a new federal consolidation loan. Borrowers who choose an income-driven repayment plan for their new consolidation loan don’t have to make any payments to qualify (unlike rehabilitation), but consolidation does not always have quite as good of a credit reporting outcome as rehabilitation does. And existing Direct consolidation loans cannot be re-consolidated if there are no additional loans to include.

Other Options To Resolve Defaulted Federal Student Loans

Defaulted federal student loans can qualify for certain administrative discharge programs, such as the Total and Permanent Disability discharge program and the Closed-School Discharge program. Borrowers in default on their federal student loans can also potentially enter into a settlement; however, settlements are governed by strict guidelines which would limit any associated balance reduction. And since settlements typically must be paid in a lump sum, it might be prohibitively expensive for many borrowers.