Private student loans don’t have to offer the same borrower protections and repayment options as federal student loans. Unfortunately, this means these borrowers face a greater risk of private student loan default.
Additionally, the process for dealing with defaulted private student loans is very different than with federal student loan default. It can also be just as confusing to navigate.
If you’re in private student loan default, however, timing is everything. Therefore, acting quickly is crucial to minimizing damage to your credit. Plus, you’ll protect yourself from the worst consequences, such as wage garnishment.
Here’s what you need to know (and do) to get defaulted private student loans under control.
What can trigger a private student loan default?
First, private student loan holders should understand how they might end up in default. Reviewing your contract will help you understand when your lender will consider your loan in default — and help you avoid those circumstances.
Remember, each private student loan might have different default triggers outlined in the loan contract. Here are some common events that can trigger a private student loan default.
1. You miss payments
Default are most often a result of non-payment. Usually, the loan will default when it’s overdue for 120 days, or three months.
However, some lenders will consider a loan defaulted on the first missed student loan payment. That’s why it’s important to check your loan agreement to see how long you have from the first missed payment until the loan defaults.
2. Cosigner enters bankruptcy or dies
Most borrowers need decent credit to get private student loans. But if a borrower’s credit is only so-so, they can rely on cosigners to originate a loan. The lender views the cosigner as equally responsible for the student debt.
Thus, certain changes in a cosigner’s status can trigger a private student loan default, even if you’re making every payment on time, according to a CFPB report. These auto-defaults happen most often when a cosigner dies or enters bankruptcy.
3. You file for bankruptcy or default on another loan
A private student loan might also auto-default if your credit status or history dramatically changes. For instance, if you enter bankruptcy or default on another loan, your lender may put your loan in default.
Borrowers preparing to file for bankruptcy or having trouble keeping up with other debts should check the rules for default. Look at your private student loan contract to understand how this situation will affect your student debt.
Here’s what happens when you default on private student loans
If your private student loan defaults, you’re probably wondering what comes next. Here’s what usually unfolds when you default on private student loans.
1. Your full student loan balance will be immediately due.
Once you default, your original repayment schedule and agreement will be void. Your lender will then demand full payment of your remaining student loan balance. They will usually start the collections process or sell your debt to a collections agency.
2. The default will go on your credit.
The lender will likely report the default to credit bureaus.
They will also add it to your and your cosigner’s credit histories. It will be listed there for seven years and significantly damage your ability to get credit during that time. You’ll also have to rebuild your credit after student loan default.
3. Your defaulted private student loan could get sent to collections.
During the collections process, your debtor will contact you and any cosigner listed to try to get repayment for this debt. Expect a lot of debt collection calls and mail notifications.
4. You might face hefty collections fees.
Collection fees might be assessed and added to your debt after a student loan default. These are set by your private student loan contract or state law.
5. The debtor can sue you over the defaulted loan.
If the initial efforts to collect on a defaulted private student loan are unsuccessful, a debtor will probably continue to pursue you (and your student loan cosigner, if you have one) for repayment.
However, private lenders or debt collectors have to get a court judgment to get access to your money. This requires the debtor to sue you over the loan. During this process, they must prove the legitimacy of the debt and their right to pursue you for payment.
The creditor is more likely to sue and seek a judgment if it determines you have the money to pay but simply won’t. On the other hand, if it’s apparent that you lack the funds to pay even if they sued, many lenders won’t bother.
6. Your wages could be garnished.
If the debtor is successful in its lawsuit and the court files a judgment against you, the lender will have the right to take action beyond calling and sending letters. Specifically, the debtor can try to get at your money.
The court’s judgment will include a determination of exactly how much you owe and will allow the creditor to seize assets to settle it. The debtor might do so by:
- Garnishing your wages (up to 25 percent of your net pay)
- Seizing assets like a bank account
6 options for handling defaulted student loans
The above consequences can result from a private student loan default. But you won’t go straight from missed payment to garnished wages. There are several options you can access along the way to handle your defaulted private student loan.
1. Request student loan repayment assistance
If you’re having trouble keeping up with loan payments or have already missed one, don’t ignore the problem. Reach out to your lender and inquire about your options.
Some private student lenders will offer forbearance or temporarily adjust payments to allow you to catch up. If your debt is in collections, you might be able to work out a new payment plan with the collector.
There’s no guarantee the lender will grant your request, but it’s worth a shot. The only way to know for sure is to contact your student loan servicer or collector and request repayment assistance. You can use this sample letter to get a response quickly and work toward resolving this debt.
2. Refinance the private student loan
Another option is to pay off the student loan in full. If you have the cash on hand to do so, you can use that. But if you’re in default, you probably won’t be able to repay the debt in full.
Another option might be to refinance the student loan. You’ll get a new loan that you can use to repay the defaulted private student loan.
With a default on your credit, it’s unlikely that you’ll be able to qualify for a student loan refinance by yourself. See if you can find someone with good credit who’s willing to be your cosigner for a refinanced student loan.
Or, you can try to get a loan from family or friends to repay or settle your defaulted loan. While this might be easier to get, this option can put your relationship at risk, so tread carefully.
3. Settle your private student loan debt
If your debt is in collections but has no judgment on it, another option might be to settle your student debt. Usually, you do this by speaking with the collector and negotiating a lump sum payment for a portion of your debt.
Contact your debt collector and ask them how much it would take to settle the debt. Try to get them to name a figure first, and don’t be afraid to try to talk them down further.
This will work best if you have some savings or cash you can offer now as leverage in your negotiations. It can also be effective if you have a friend or family member willing to give you a personal loan for this debt once you reach a settlement.
4. Know your rights as a borrower
As a borrower, you still have certain rights — even if you’re in default. Research those rights and don’t be afraid to enforce them.
Remember, it’s illegal for a debt collector to use unfair, deceptive, or abusive debt collection tactics. They also can’t collect a private student loan that’s passed the statute of limitations for debts in your state.
For instance, debt collectors are not allowed to call you before 8 a.m. or after 9 p.m. And if you tell them not to contact you at work, it is illegal for them to continue to do so.
Debt collectors also cannot harass you. If you want to limit how and when your debt collectors contact you, the CFPB offers a few form letters you can use to make these requests.
5. Dispute the debt and request verification
It can also be worthwhile to try to dispute your private student debt.
Under the law, a debt collector has to provide you with certain information that proves you are, in fact, legally obligated to pay the debt. But you will usually have to request full proof of the loan’s origins.
You’ll need to take this action right away. You have 30 days from initial communication or discover of the debt to request verification that the debt is legitimate. Disputing the debt in this time frame will put collections on hold.
You can still dispute it after those 30 days, but the lender won’t have the same responsibility to stop collections or verify the debt.
Don’t forget to write and request verification of the debt. In fact, the CFPB provides form letters to dispute a debt or request more information. The creditor should always send you verification of the debt.
Compare this information to your records. If there is a mismatch, you might be able to prove that the debt is not valid, that you owe less than the creditor claims, or that the debt doesn’t belong to you.
6. Consult a student loan lawyer
If you’re facing a defaulted private student loan, a student loan lawyer can help. Student loan lawyers can help you identify your options and work toward getting out of default. They can determine your actual liabilities for this debt, as well as how state laws could affect it.
Hiring a student loan lawyer might become more of a necessity if you’re being sued over the defaulted private student loan. An attorney can also help you dispute a private student loan you believe to be invalid, negotiate a debt settlement, or deal with debt collectors that are illegally contacting you.
Private student loan default is serious – but solvable
The bottom line when it comes to defaulted private student loans is that you just won’t have the same protections and options that you would with federal student loans. But that doesn’t mean you don’t have options.
If you get into a tough spot with private student debt, work quickly with your lender to resolve it. And should you default, know your rights and spend some time figuring out the best option for you. With some work, you can get past a private student loan default and start rebuilding your finances.
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