Private Student Loan Default [Explained]

When you default on a student loan you are considered as a risk as you are looked upon has someone who isn't a credible borrower. Here is an in dept guide on what to do when you default on your private student loans, from what causes it to how to prevent it.

Updated by Priya Shah on 2nd July 2020

Federal student loans have a number of repayment options to choose from which help the borrower in his repayment journey. Private student loans have a limited number of options to choose from, which makes it harder to repay a private student loan debt. 

This hardship faced while making payments should be combated well else will lead to missed payments which in turn leads to default. Once you default on your loans you could face some nasty consequences such as wage garnishment and much more.

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What is private student loan default?

Private student loans are those loans that are provided by private institutions/ lenders or banks. These loans unlike the federal loan options available are provided with lesser borrower protection options. 

When you miss a number of payments ( as specified by the lender) you will fall into default. Upon falling into default your credit score will take a hit and defaulting will leave a black mark on your credit history. 

In addition to this, because of the fewer borrower protections associated with private student loans, we tend to easily fall into default. Defaulting is irrespective of the loan type, but it should be kept in mind that a default could potentially lead to a lawsuit.


What causes student loan default?

If you are one of the many Americans with student loan debt and are looking for ways to repay your loans, you know that it is crucial to make on-time payments. Apart from missing out on making your payments on time here are some ways you could potentially fall into default.

1) Missing out on on-time payments 

Unlike the federal loans that allow for a 270 day delinquency period before your unpaid fall into default, private loans can fall sooner (or sometimes later as per specified by your lender). 

A few lenders can report you as a defaulter after missing a single payment while some allow three to up to four months of delinquency. 

2) You default on another debt or file for bankruptcy

If you have other debts that led you to file for bankruptcy even when you paid your student loans on time you could fall into default on all your debts. It is crucial to check or reexamine your student loan contract. 

3) Death of cosigner or declaration of bankruptcy by the cosigner

When getting a cosigner on board to strengthen application status we need to remember the fact that while sharing debt the actions made by the cosigner can affect our status as well.

With the death of the cosigner, there are chances of your debt falling into default automatically. Or even if you are making on-time payments and your cosigner declares bankruptcy you will automatically default on your student loans.


Consequences of defaulting on private student loans

If you have had the unfortunate situation of falling into default you can expect the following situations to take place -

1) Your lender could demand an immediate or full payment

If things couldn’t get any worse, because you couldn’t meet the monthly payments your lender will start asking for an immediate and full repayment of the loans borrowed.

When you miss a payment you break the terms and conditions to be met and due to this cancellation of the agreement made by the borrower and the lender you will be asked to repay the debt in full.

2) You damage your credit score

Once defaulted you will be reported to the credit bureau by your lender. On-time payments play a major role in your credit score, once these payments aren’t made your credit score will drop. 

Once you default, it will be shown in your credit history which will affect your credibility as a borrower. This can stay with you for up to 7 years unless you file a successful dispute and get it removed.

3) You could get your defaulted loans assigned to a collection agency

Once defaulted and assigned to a collection agency, the student loan borrower can expect calls and emails from the collection agents requesting them to make their payments. 

It should be noted that the collection agents should not call you before 8 am and after 9 pm. You still have your rights as a borrower.

4) Addition of extra charges in the form of collection fees

Once your loans are sent to a collection agency the borrower will be charged extra fees on top of the loan amount owed. The fees added could be up to 25% to 40% to your balance. 

5) You could get sued

If the lender still feels you are capable of making the monthly payments and you are choosing not to make the payments to be made then you could potentially get sued and brought to court. 

6) You could lose out on the time frame provided by the statute of limitations

The statute of limitations provides you the rights as a borrower, they come with a time frame after which i.e, once expired your lender could take any legal action against you. The time frame varies from state to state.

7) Wage garnishment 

Once you have to go to court and you lose, a court order will be sent which allows the debt collector to garnish your wages. 


How to prevent private student default

Here are four actions that could help you prevent the private student loan default.

1)Temporary forbearance for postponing or pausing the payment

Due to any problem like loss of a job, or any personal issues you are not able to pay your loan than you can postpone your payments through forbearance (which is provided by very few). As private lenders don’t have flexible repayment plans as the federal government. 

That doesn’t mean you are completely relieved as interest will continue to accrue, pausing the payment can be helpful but make sure you watch out for the interest accrued. It helps to pause the payment without getting default if you are struggling for your monthly payments.

2) Speak to a lender regarding the reduction of monthly payments

If your lender isn’t allowing forbearance on your payment but they may be willing to reduce your monthly payments for a certain period of time. They had rather allow pay something than stop making your payment completely. After all, if you don’t get any other alternative to pay it’s always worth calling to see if it any accommodation can be made. 

3) Refinancing your loan

If your loans are getting hard to manage you can often go with the option of refinancing i.e. a way to restructure your currents debts with new terms and conditions. 

When you refinance your student loan you can choose a repayment plan between 5 to 20 years.  But in order to qualify for refinancing you will have to pass a credit and income check or apply with a cosigner.  

4) Student loan repayment assistance programs

If you have the hard burden of loan payment this can help you out to get rid of your loan faster. These programs offer thousands of dollars in loan assistance in exchange for working the place we are living in.

Student loan default affects your financial, professional, personal life drastically. Therefore it is advised to take measures to not enter default. Still, if you find yourself in default, Handling student loan default helps pay back your debt faster. Postpone student loan payment can also be a useful option to consider.

Student loan settlement helps you lower the payment you owe to your lender if your financial conditions are tough. Student loan settlement helps you make an agreement with the lenders to lower and provide your better repayment options. When loans (federal loans) are not paid for a certain period of time (90 days), your loans are in delinquency. Similarly, loans not paid for about 90 to 270 days, they become default student loans. Know the difference between default and delinquency

Finally, with all these support from ED and private lenders, gradually the number of default loans is declining as years pass by. Student loan default statistics concludes the default loan details and statistics.  It is necessary, to understand how important it is to avoid student loan default as it can affect you in multiple ways. 

Other details on rates, consequences, and settlement Student loan default and delinquency give drawbacks to it. 

Refinancing your student loans helps you to manage your payments, and also lower your interest rates. Any steps taken in advance to manage your repayment will help you not enter default and delinquency. It is advised to have an in-depth understanding of how to Refinance defaulted student loans.

Student loan rehabilitation is a disciplinary action taken to get out of default, which requires you to pay 9 months of repayment on time and the default status will be removed.

 


Worried about your college tuition? Learn more about student loans


Already defaulted on your private student loans? Here's how to get out of default

If you are in the stage of default or already in default,  timing is everything you’ll need. Act fast to minimize the potential damage to your credit score and avoid harsh consequences. Try consulting a lender to help to avoid the circumstances. After the late payment/default, the lender will report it to the credit bureau. It should be noted that if you default then it will directly affect your cosigner's credit history.

Best ways to avoid defaulting your private student loan is to -  

1) Dispute the debt

If you feel that you owe this defaulted private student loan, it's worth disputing the debt. if you are really not capable of paying off your loan you need to defend as long as you make your dispute within 30 days of hearing from the loan collector he will be legally obligated to provide full verification of the loan origination.

2) Paying off your loan as a full payment

paying of full payment at once is not possible for most of the borrower but paying it off at once can help you stop the default, as well as make a way to get out of default. 

3) Talk to legal defender/ advocate

it could turn into a smart option to consult a lawyer if the loan collector has made efforts summoned to court. The lawyer can help you understand your options. 

Federal student loans have a number of repayment options to choose from which help the borrower in his repayment journey. Private student loans have a limited number of options to choose from, which makes it harder to repay a private student loan debt. 

This hardship faced while making payments should be combated well else will lead to missed payments which in turn leads to default. Once you default on your loans you could face some nasty consequences such as wage garnishment and much more.