Federal student loans usually have more benefits and protections than private student loans. For example, federal student loans typically have fixed interest rates and the option for income-based repayment plans. With private student loans, many lenders don’t offer forbearance or deferment for financial hardship. This allows for private student loan defaults to be more common.
How Does Private Student Loan Default Work?
The timeframe and causes for sending your private student loans into default depend on the lender. To find out exactly what events will put your loan into default, it’s important to read your contract.
For federal student loans, a borrower isn’t considered to be in default until they are nine months behind on payments. Private student loans typically have a much shorter timeframe – it could be three months of missed payments for a borrower to be in default. However, some lenders are stricter than that, and someone might be considered in default if they miss one payment.
Other things that can cause a default include a cosigner entering bankruptcy, or you as the main borrower filing for bankruptcy or defaulting on another loan you’re responsible for.
In whatever manner it happens, though, being in default on a private student loan can be bad news for your credit and finances. If you’re in default on a private student loan, a lender will start to try to collect from you – and more.
What Happens When You Default on Private Student Loans?
The following are some of the steps lenders may take if someone is considered in default on their private student loan, and what options are available to borrowers.
The Lender Will Report Your Late Payments/Default to the Credit Reporting Agencies
Credit reports show not only the loans people have in their name but also whether or not they’re making on-time payments. If you default on student loans or even have late payments, it can significantly affect your credit score and credit history.
The Lender Can Seek Repayment From Any Cosigner
Many private student loans require cosigners because college students have little if any credit history. A lender can try and force cosigners to repay the loan, because that cosigner is considered another borrower, with the same responsibilities as the student borrower.
The Lender Could Demand Full Repayment
If a borrower is considered in default on a loan, the lender may demand immediate, full repayment. Some creditors may demand this after a person is only 30 days past due. The reason this can happen is that the borrower is considered to have violated the terms of the contract.
The Lender Could Send Your Account to a Collection Agency
Reporting the loan to a collections agency is often the first step lenders will make, and they will try to avoid going to court. A third-party debt collector will send you collection letters and call you, but the Fair Debt Collection Practices Act does prevent them from engaging in harassment, abusive, or deceptive practices.
The Lender Could Sue You and/or Your Cosigner for the Amount
A lender can sue both the borrower and the cosigner for student loans in default, and the worst thing to do is ignore the lawsuit. If you ignore a lawsuit, the lender can seek a judgment against you. The judgment means the lender can then take additional steps against you, including wage garnishment, freezing your bank accounts, and putting liens on any property you own. A judgment can last for 10 years, or sometimes even longer, and as that’s going on your debt continues to accumulate interest.
If you can’t settle the lawsuit, you may have to file for bankruptcy. That won’t eliminate student loans, but you won’t have other simultaneous debts to pay off. There are also repayment bankruptcy options where you can make monthly payments over a period of anywhere from three to five years.
The Lender Could Garnish Your Wages
In order for a lender to garnish your wages because of defaulting on a private student loan, they have to get a court order. The guidelines for obtaining this kind of court order vary depending on the state, and there are some states where wage garnishment isn’t allowed.
The Lender Could Seize Your Assets
For a lender to seize assets, they would first have to get a judgment against the borrower or cosigner. Seizable assets usually include financial levies on bank accounts and liens against property.
Lasting Effects of Private Student Loan Default
It’s nearly impossible to bankrupt out of student loan debt and private student loan forgiveness is also highly unlikely. And reaching a point where you’ve defaulted on your loans can affect your life for a decade or more. While the blemishes on your credit report go away after seven years, a judgment can go on for 10 years or more.
Can You Get Out of Private Student Loan Default?
Some lenders will allow you to make interest-only payments for a period of time. Other lenders may let you go with a forbearance option if you’re facing financial hardship, although interest continues to accrue while your loans are in forbearance. You may consider contacting your lender to see if you can negotiate a payment plan to bring the loan back to ‘current’ status.
Regardless of the specific route you take, being proactive can save you from long-term damage when you aren’t able to pay your private student loans.
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