3 Ways To Deal with Private Student Loan Default

If you have federal student loans and don’t make payments for nine months, your loans are in default. You also have clear-cut options about getting out of default, like loan rehabilitation or consolidation. Unfortunately, that’s not the case with private loans.

Private loans come from private lenders and don’t have the same benefits or protections that federal loans have. Read on to learn about private student loan default and what you need to know.

What is private student loan default?

Student loan default is a type of loan repayment status that signifies that you’ve missed a payment or many payments. As noted above, federal loans are considered in default after 270 days. Before that, they’re simply “delinquent”.

Private loans can enter default much earlier. If you miss a single payment, you could potentially be in default. However, the Consumer Financial Protection Bureau (CFPB) states private loans typically enter default after a period of 120 days or three missed student loan payments.

In many cases, private student loan default occurs, because the borrower missed payments. The default timeline can depend on the private lender, but it might be after one or three payments.

You can typically find this specific information in your promissory note or legal contract with your lender. However, private student loan default can also be triggered if you or a cosigner dies, if you declare bankruptcy, or end up defaulting on another loan.

How to handle private student loan default

If you’re dealing with a private student loan default, you want to remedy the situation ASAP. You don’t want to continue to run your credit into the ground, accrue more fees, or have your wages garnished. Here are some steps to take.

1. Contact your private lender

As early as possible, reach out to your private lender to learn about your repayment options. See if you can opt for deferment or forbearance, and put your payments on pause if you’re struggling to make payments.

If for some reason there’s been an error, you’ll want to dispute the debt. Regardless of the situation, get everything in writing and take action so you can get your loans in good standing. Your private lender might have its own get-out-of-default protocol.

2. Negotiate a settlement, if possible

If you have private student loans in collections you might be able to work with your debt collector to negotiate a settlement.

Settling private student loan debt means negotiating for a payoff amount that’s lower than what you owe. Often, this requires a lump sum payment. Some debt collectors are also willing to include your personal assets in the negotiation.

3. Contact a student loan lawyer

If you have private student loans in collections and are being sued or things are getting increasingly complicated, you may want to contact a student loan lawyer. A student loan lawyer can help you manage the situation and ensure your rights are being protected.

Consider Adam Minksy or Jay Fleischman, student loan lawyers that our team highly recommends. It’s important to note that each state has different laws regarding private student loan defaults. Also, it’s very rare and difficult to discharge private loans in bankruptcy.

What can happen when private student loans are in default

As soon as you foresee your private student loans headed for default, address the issue as soon as possible. If you aren’t making monthly payments on your private loans, student loan default can be trouble for your financial stability in a few different ways.

Your credit could tank

Missing payments on your private student loan can end up on your credit report and hurt your credit score for seven years. Not only can it affect your credit, but also your co-signer’s credit, if you have one.

This affects future purchases or future contracts. For example, if you need to rent an apartment, apply for a mortgage, credit card, or another type of loan, you might have a tough time getting approved. If you do get approved, you face higher interest rates due to poor credit.

You might be hit with fees and penalties

On top of hurting your credit, you might incur fees and penalties for late payments. You may be charged a flat fee or a percentage of your monthly payment as a late fee, but it depends on the lender.

You could have defaulted private student loans sent to collections

If you’re in private student loan default, you could have private student loans in collections. What that means is that your lender has sent your loans to a collections agency.

A debt collection agency’s job is collecting on the debt and getting it repaid. Though there are statutes of limitations around consumer debt, and laws in place to minimize debt collection abuse and scams, dealing with debt collectors can be anxiety-inducing and scary.

Some are aggressive and persistent. On top of being put in collections, you might have collection fees tacked on to your balance.

You can be sued

If you don’t repay your federal loans and they’re in default, the federal government has its ways to recoup the money for the loan. It can garnish your wages, up to 15%, and garnish your Social Security benefits or your tax refund.

Private student loans aren’t as simple, so your private lender may sue you. If the court’s judgment rules in their favor, they could proceed with a wage garnishment, and seizing assets such as a car or home to pay back the loan. You might have additional protections from this happening, depending on where you live as each state’s law is different.

Bottom line

Dealing with private loan default is a serious matter that shouldn’t be ignored. There are legal ramifications like a lawsuit and a very real impact on your credit that will affect your financial future. Take action either with your lender, loan servicer, debt collector or with a lawyer, early.