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 31st August 2020
Federal student loans have many repayment options, which helps the borrower with his repayments. Whereas, this is not applicable for private student loans, which makes it harder to repay a private student loan debt.
This hardship faced while making payments should be combated well, else this will lead to missed payments causing a default on loans. Once you default on your loans, you could face some unpleasant consequences such as wage garnishment and many more.
Table of contents
- What is the private student loan default
- What causes private loan default
- How to prevent
- Getting out of default
What is a Private Student Loan Default?
Private student loans are loans that are provided by private institutions/ lenders or banks. These loans, unlike federal loans, do not have many borrower protection options.
When you miss several payments ( as specified by the lender), you will fall into default. Defaulting will leave a black mark on your credit history.
Besides, because of fewer borrower protections associated with private student loans, we tend to fall into default easily. Defaulting is irrespective of the loan type, but it should be noted 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 looking for ways to repay your loans, you must know that it is crucial to make on-time payments. Apart from missing timely payments, here are some ways you could potentially fall into default.
Missing on-time payments
Unlike the federal loans that allow a 270 day delinquency period before your unpaid fall into default, private loans can fall sooner (or sometimes later as specified by your lender).
A few lenders can report you as a defaulter after missing a single payment while some allow three to four months of delinquency.
You default on another debt or file for bankruptcy
If you have other debts that led you to file bankruptcy even when you paid your student loans on time, you could fall into default on all your debts. It is crucial to check and re-examine your student loan contract.
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 situation 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 were unfortunate to have your loans in default, you might face the following consequences:
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 quick and full repayment of the loans borrowed.
When you miss a payment, you break the terms and conditions to be met, and due to which cancellation of the agreement made by the borrower and the lender, you will be asked to repay the debt in full.
You damage your credit score
Once defaulted, you will be reported to the credit bureau by your lender. On-time payments play a significant 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 seven years unless you file a successful dispute and get it removed.
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.
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 apart from the loan amount owed. The fees added can vary from 25% to 40% to your balance.
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, then you could potentially get sued and brought to court.
You could lose time 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.
Once you 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.
Temporary forbearance for postponing or pausing the payment
Due to any problem like loss of a job or any personal issues, and you are unable to pay your loan. Then 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 entirely relieved as interest will continue to accrue. Pausing the payment can be helpful, but make sure you watch for the interest accrued. It helps to break the payment without getting default if you are struggling for your monthly payments.
Speak to a lender regarding the reduction of monthly payments
Suppose your lender isn’t allowing forbearance but ready to reduce your monthly payments for a short duration. Unfortunately, no other alternative exists. It’s always worth trying to see if any accommodation can be made.
Refinancing your loan
If your loans are challenging to manage, 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 to qualify for refinancing, you will need to pass a credit and an income check or apply with a cosigner.
Student loan repayment assistance programs
If you have a burden of the loan payment, this can help you 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 not to 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 harsh. The student loan settlement enables you to agree with the lenders to reduce and provide your better repayment options. When loans (federal loans) are not paid for a certain period (90 days), your loans are in delinquency. Similarly, loans are not paid for about 90 to 270 days. They become default student loans.
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 defaults 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 nine months of repayment on time, and the default status will be removed.
Worried about your college tuition? Learn more about student loans
How to get out of Default
If you are in the stage of default or already in default, time is all you need. Act fast to minimize the potential damage to your credit score and avoid jarring 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 -
Dispute the debt
If you feel that you owe defaulted private student loans, it's worth disputing the debt. If you are 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.
Paying off your loan as a full payment
Paying full payment at once is not possible for most of the borrowers, but paying it off at once can help you stop the default, as well as make a way to get out of bankruptcy.
Talk to legal defender/ advocate
You can consider the 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 several 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 thoroughly else. It will lead to missed payments, which in turn leads to default. Once you default on your loans, you could face some damaging consequences such as wage garnishment and much more.