Millions of Americans default on their student loans because they simply cannot afford the monthly payment. Although it more commonly occurs with federal student loans, private student loan default happens too. If your private student loans are in default, or you fear that they soon will be, there are steps you can take to remedy the situation.
Student Loan Delinquency vs. Student Loan Default
Student loan delinquency and student loan default often get lumped together in student debt statistics. However, it is important that you understand the difference.
Delinquency essentially just means “late.” In general, a student loan enters a delinquency period the first day after you miss a payment. However, every private loan comes with its own terms. As soon as you realize you missed a payment or cannot afford your next payment, you should call your loan holder. Getting your loans out of delinquency may just require making the missed payment plus a late fee.
Some loan companies skip the delinquency period altogether. Instead, they put your private loans into default status after just one missed payment. Others put your private student loans into default when delinquency lasts for 120 days. During private student loan default, instead of just owing the missed payments, you now owe the full amount of your loan balance.
What Causes Private Student Loan Default?
You Miss Payments
Most cases of default occur when a borrower fails to make payments. Generally, private student loan default occurs when your payment is overdue for 120 days or four months.
Keep in mind that every lender has its own definition of default. Read through your promissory note or speak directly with your lender to find out their terms. Some lenders consider a loan defaulted after just one missed payment. Knowing the terms now can help you avoid or quickly get out of default in the future.
Your Cosigner Goes Bankrupt or Dies
Cosigners help borrowers secure better interest rates and loan terms. They may never make a payment on your loan, but they are equally responsible for the debt in the eyes of your lender.
Any change to your cosigner’s livelihood or financial status can greatly affect your student loans. An auto-default is most likely to occur when your cosigner dies or files for bankruptcy. This can happen even if you always pay on time. To avoid this, release your cosigner from your loan as soon as possible. Your loan may come with rules for cosigner release, or you may need to refinance to release your cosigner.
You Default on a Different Loan or File for Bankruptcy
Drastic changes in your credit status or history can also cause private student loan default. Most commonly, lenders may place your student loan debt in default if you default on a separate loan or file for bankruptcy. In these cases, you are a risk to borrowers, so they want their money back immediately.
If you are close to either bankruptcy or default on another loan, make sure you understand the rules for default. Your private student loan contract will define default and explain the specific circumstances that cause your student loans to enter default.
What Happens When You Default on a Private Student Loan?
You Now Owe Your Private Student Loan Balance in Full
Once you enter default, your lender no longer wants to wait 5, 10, or 15 years for repayment. Your monthly payment plan and other repayment terms no longer apply. They may accelerate your loan and demand full payment immediately.
The Default Appears on Your Credit and Your Cosigner’s Credit
Your lender will most likely report the default to credit bureaus, making it part of your credit score and credit history. It will remain in your credit history for seven years. During that time, you will have trouble taking out a home loan, applying for credit cards, leasing a car, or securing any other type of loan. It can even affect your ability to lease an apartment depending on whether the landlord runs a credit check.
The default shows up on your cosigner’s credit report too. This can cause significant personal tension, especially if your cosigner is planning to purchase a home or secure a car loan in the near future.
Your Default Student Loans Get Sent to Collections
Most lenders work directly with a collections agency or debt collector. This third party acts on the lender’s behalf to collect your payment. You can expect frequent debt collection phone calls and mail notifications during this time.
You Owe Large Collections Fees
State laws and loan contracts dictate how much, if any, you will owe in collection fees. Lenders add these fees to your current loan balance, increasing the amount owed. The sooner you settle your debt, the fewer fees you will have to pay.
Your Debtor Can Sue You
Your debtor has the legal grounds to sue you if their collection efforts are unsuccessful. During the lawsuit, your lender must prove the legitimacy of the student loan debt and their right to seek payment. In some cases, a judge may order a lien against your wages or the liquidation of your personal assets (car, house, etc.). Filing for bankruptcy is the only way to stop the lawsuit proceedings.
Bear in mind that debtors usually only sue if they believe you have the means to pay back your debt but are choosing not to. It is generally not worth it for them to sue defaulted borrowers who do not have the funds to pay them back.
You Face Wage or Non-Wage Garnishment
If the debtor has success with its lawsuit, the court will file a judgment against you. This gives the lender the ability to access your money. Specifically, the court judgment determines how much money you have to repay and allows the debtor to seize your assets. This is where garnishment comes in.
Wage garnishment allows debtors to directly contact your employer and require them to hand over up to 25% of your net pay from each paycheck. In general, wage garnishment occurs until your loan is paid in full.
Non-wage garnishment allows debtors to collect funds from defaulted borrowers who do not earn regular employment wages. Instead of taking money from a paycheck, creditors seize assets like your bank account. They will serve your bank a non-wage garnishment affidavit. Your bank is then legally obligated to turn over enough money to cover the amount owed. If you owe more than what you have in the bank, the bank will simply hand over all of your money. This can leave you with $0 left in the bank.
Dealing with Private Student Loan Default
If you are currently in default or heading in that direction, you do have some options.
Ask about Student Loan Repayment Assistance
If you struggle to make your loan payments each month or recently missed one, you need to find out about your options. Many lenders offer forbearance, deferment, or a temporary payment adjustment. These services give borrowers a chance to catch up on their debt before it heads into default. Some collection agencies will even work with you to figure out a new payment plan.
Pay Off Your Loan in Full
Paying off your student loans fast in full will solve your problems. The debt will disappear and collections agencies will stop calling. You have three main options when it comes to paying off your loans–savings, friends and family, or refinancing.
Using your savings is an ideal but unlikely scenario since you are in default. However, you should rely on your savings as much as possible to reduce the amount you need to borrow.
Borrowing from your family and friends has its perks and downsides. On the plus side, you will not need to pass a credit check or secure a cosigner. On the other hand, borrowing money from relatives can cause tension in your personal relationships. It may not be worth the risk, so think it through before going with this option.
Refinancing pays off your current loan with a new loan. Unfortunately, a default on your credit makes qualifying for refinancing difficult. You can try to find someone, like a parent or close relative, to sign on as your cosigner for the refinanced student loan. Be upfront with them about your financial situation so that they can make an informed decision.
Understand Your Rights
As a borrower, you do have rights. Knowing these rights will help you maintain a sense of control while you are in default. For one, you have the right to know the details about your loan. This means that you can call your loan provider and ask for status updates or balance updates. You can also call with any questions about the terms and conditions.
You also have rights when it comes to debt collectors. Collectors cannot call you before 8 a.m. or after 9 p.m. They cannot call you at work if you tell them not. They also cannot harass you. The Consumer Financial Protection Bureau provides sample letters that you can use to communicate with your debt collector and to enforce your rights as a borrower.
Settle Your Debt
Settling your private student loan debt is an option if your debt is in collections but has no court ruling on it. The goal with debt settlement is to strike a deal with your debtor to resolve your debt quickly. You negotiate a lump sum payment to settle your debt without having to go to court. This can also mean that you get out of private student loan default without having to pay off your full loan balance.
Set up a meeting or phone call with your debt collector to start this process. Find out how much money it would take to settle your debt and then negotiate from there. Do not be afraid to push back and try to lower their offer. Go into the conversation knowing how you will pay for the settlement and use that as leverage. If they know that you have the means to pay off the settlement immediately, you may strike a better deal.
In most cases, you must pay in full within three or so months of settlement. Make sure you have the means to pay off the agreed upon amount. Use your savings or secure a personal loan from friends and family.
Dispute the Debt
Disputing your debt allows you to verify the accuracy of your debtor’s claim. Debt collectors must provide you with information that proves you are legally obligated to pay the debt. To start this process, you need to request proof of the loan’s origins. Simply send a written notice asking for verification of the debt.
You only have 30 days from the time of initial communication about the debt to make this request. This will start the dispute process and put collections on hold. If you wait longer than 30 days to dispute the debt, your lender has no obligation to stop collections or verify the debt.
Compare the information you receive from the lender to your records. Does something seem off? It is possible that this verification can prove that the debt is not yours, that you owe less than they claim, or that the debt is invalid.
Speak with a Student Loan Lawyer
Student loan lawyers can help you navigate your delinquency period or default status. These lawyers know the ins-and-outs of private student loans and your state laws. They will identify your options and help you pick the one that works best for you. A lawyer is especially handy if your lender sues you.
Repairing Your Credit Score after Default
Your credit score will take a hit if you got into private student loan default. This can make it difficult to get approved for a mortgage, lease a car, or apply for a credit card. Some landlords even run a credit check before taking on new tenants. Luckily, there is a lot you can do to repair your credit. Here two simple ways to improve your credit score in 30 days or less.
- Negotiate Late Payments: Speak with your creditors to see if they will erase late payments from your credit history. It only takes a few minutes to ask, and you have nothing to lose.
- Dispute Errors on Your Credit Report: Get ahold of your credit report to look for errors. Contact the credit-reporting agency to dispute the errors. You will need to provide proof like payment records and identification.
You can learn more ways to improve your credit score by reading our article here.
Commonly Asked Questions
Do private student loans have a statute of limitations?
Yes. Your creditor only has a set amount of time during which they can sue you for repayment. Each state determines its own time limit or statute of limitations for small claims court cases. You can find out the statutes of limitation for your state here.
If the statute of limitations runs out, your creditor can no longer sue you, threaten to sue you, or take actions against you to force you into repayment. They can only request that you voluntarily repay the debt.
Can a private student loan be discharged?
Private student loan discharge is rare but possible in some situations. It can occur due to death, total and permanent disability, and bankruptcy. Whether this applies to you depends entirely on your situation and who owns your loans.
Currently, only Wells Fargo, Sallie Mae, Discover, and New York Higher Education Services Corp. offer total and permanent disability discharge. Your doctor, the Veteran’s Affair’s office, or the Social Security Office will need to provide the necessary documentation to start the process. Check with your private student loan company to see what their policy is and what proof they require.
Discharging student loans through bankruptcy is hard, but it can happen. You must file for bankruptcy and then file a lawsuit against your student loan holder in an adversary proceeding. During your case, you must prove to the judge that repaying your student loans would cause undue hardship. A bankruptcy attorney can help you gather the evidence you need to prove undue hardship.
How long do defaulted private student loans stay on your credit report?
Defaulted and delinquent student loans remain on your credit report and your cosigner’s credit report for seven years. You will have trouble taking out new loans or applying for credit cards during that time.
Can I get my student loans taken off my credit report?
Student loans will remain on your credit report unless you can successfully dispute that the debt does not belong to you.
Can they take my taxes for private student loans?
Private student loan companies cannot seize your tax refund to pay off your student loan debt. However, they can take that money as soon as it enters your bank account if the court ruled for non-wage garnishment.
The federal government can seize your tax refund for defaulted federal student loans.