As of 2018, the United States is home to $1.4 trillion dollars in student debt, with $11.6 billion of that debt originating from private loans. And while federal loans come with their own set of challenges and risks, all 1.37 million private loan borrowers are often subject to fewer protections and less flexible repayment plans than those offered under federal loan agreements.
Less accommodating repayment options and more rigid terms can quickly lead to private student loan defaults, which is a dangerous financial place to be. It’s also one that you should do your best to avoid or address immediately – even if ignoring the problem seems easier.
What Happens When You Default on Private Student Loans?
When you fail to pay your loans for three or more months, most private student lenders will consider your account to be in default. This is in contrast to the typical 270-day window, or nine months, for federal student loans.
Sadly, you’ll have a lot of company if you’re in default on your student loans. However, be ready for the following things to happen:
- Your lender will contact you and request an immediate payment of your loan balance, in full
- If you fail to respond, and if you have a cosigner, they will be contacted and asked to make the payment
- If no attempt is made to remove the account from default status (by you or your cosigner), then your account will likely be sent to a collection agency, which will reach out to the account holder via phone and email
- At some point, if the the collections requests continue to go unanswered, the lender can choose to sue you and/or your cosigner in an attempt to collect the debt
The Biggest Risks of Defaulting on Your Loans
Throughout the collection process, even before it officially goes into collections, your lender will likely report your late payments to the major credit bureaus. This will cause significant damage to your credit score, as well as your cosigners’.
This type of mark on your credit report can lead to problems securing loans for mortgages, cars, or personal loans. It can also impact your ability to refinance your loans in the future. However, there are more worrisome consequences if your default continues to go unaddressed.
If your lender does seek legal action, and it wins, it can garnish your wages, seize your assets, or place liens on your property.
What to Do If Your Private Student Loans Are in Default
If you defaulted on private student loans, or you’re about to find yourself there, take a deep breath. There is hope. However, it’s essential that you get on the phone with the lender and start to address the issue. After addressing your defaulted loans, you might find that one of these options present a viable path to the light at the end of the tunnel.
Ask for a Forbearance or Deferment
Both forbearances and deferments will temporarily postpone your loan payments, with the way interest is accrued being the primary difference between the two. In most cases, when a loan is deferred it will not accrue interest during the deferment period. On the other hand, loans in forbearance will accrue interest, and the borrower will be required to repay that interest, either in monthly payments or as part of the principal balance.
Every private student lender handles things differently, but in most cases, deferments, in the traditional sense, are not available to private loan borrowers. But your best bet is to call your lender and inquire about forbearance and deferment availability and terms.
See If the Lender Will Rehabilitate the Loan
If default is unavoidable, or if you’re already there, loan rehabilitation can represent a viable means of pulling yourself out of loan disparity. Loan rehabilitation programs typically require borrowers to make a series of payments (on time), and when they’ve successfully met the terms of the rehab program, the loan will be removed from default status.
Typically, the payment is determined based on a small percentage of your income, but terms will vary. For many borrowers, that’s a feasible option and one well worth the long-term alternative. Unfortunately, private student lenders aren’t typically purveyors of loan rehabilitation services, and so many private loan borrowers won’t have this option – it’s more a feature of federal student loans. But student loan experts say it might be possible to work out that arrangement with a private student lender; it never hurts to inquire.
See If You Can Settle the Debt for Less
If you’re currently in default, you might be able to seek a settlement. Settlements are agreements between the borrower and their lender (or their collection agency) in which the lender foregoes a percentage of the loan in exchange for what is typically a lump sum payment.
Keep in mind that settlements do come with drawbacks. Private lenders are not required to settle your debt, so settlement proceedings may be futile. Additionally, this option also comes with severe credit score consequences as well as potential tax consequences.
You should always approach loan repayment decisions with caution and a complete understanding of the terms and conditions. But in this case, you’ll really have to double down and weigh the risks of settlement against the perceived rewards.
Fight the Debt
In rare cases, such as a failure of the lender or school to live up to their end of the bargain, borrowers can potentially fight the loan and request a discharge. However, if you feel this is relevant to your situation, it’s likely you will need to seek legal counsel to build a case.
Challenging your loans through legal recourse can be extremely pricey, so be sure that your efforts to discharge the loan are merited before you dive into the process.
If your loans are in default, or if you’re worried that they may go into default, you do have options. Your best bet it to speak to your lender ASAP so that you can work toward the best solution.