What happens when you default on private student loans? Here are your options

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Stanley tate

Student Loan Lawyer

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Staring at private student loan default can be scary. The consequences of defaulting on private student loans — damage to credit scores for you and your cosigner, wage garnishment, lawsuit, etc. — are many. Here's what you need to know about your options when you've defaulted on private student loans.

When does a private student loan default?

Most private student loans default, technically, after one student loan payment is missed. However, every lender has its own rules for when a private student loan defaults. So the best way to know when your loan will default is to check your promissory note.

Common reasons for default:

  • Bankruptcy. Some private lenders have placed borrowers into default when they or their cosigner file bankruptcy — even if there's no attempt to discharge the private student loan in an adversary proceeding.
  • Death of cosigner. While not as common, your lender or student loan servicer can accelerate your student loan debt when it gets notice that your cosigner dies.
  • Default on a different loan. Many promissory notes contain clauses that allow the lender to place student loan borrowers into default if the borrower's found to be insolvent, or they've defaulted on a different debt (e.g., credit card).

Can you get private student loans out of default? You typically can't get a private student loan out of default. Unlike the federal government, there are no private student loan rehabilitation programs. Once you default, your options are limited to setting up a repayment plan or negotiating a student loan settlement.

Do private student loans go away after 7 years? Private student loans are subject to statute of limitations. So your liability for your private loans could go away if the statute of limitations is 7 years of less. On the other hand, federal student loans — Federal Family Education Loans (FFEL), Federal Perkins Loans, Direct Loans, etc. — are not subject to statute of limitations. You'll continue to owe those loans until you pay them off or meet the eligibility requirements for loan forgiveness.

Defaulting on private student loans consequences

The consequences of defaulting on private student loans are:

  • Harm to credit report. After you miss your first monthly payment, your loan servicer will report late payments to you and your cosigner's credit reports hurting your FICO credit scores in the process. The late payments will stay on your credit history for 7 years.
  • Loan sent to collections. About 4-6 months after you miss your first payment, your loan will default and then charge-off. When that happens, your loan will usually be sent to your lender's collection department. From there, your loan can stay there for a few months, or it will be sent to a debt collection agency.
  • Collection fees. Your loan contract may allow your lender to add collection fees to your balance. Unlike the federal government, which waives collection fees for defaulted student loans, private lenders typically won't waive collection fees unless you negotiate a settlement.
  • Lawsuit. Many lenders will wait several months, years before they sue. It costs them money to hire a law firm. As a result, many lenders usually wait until after debt collection agencies prove ineffective at collecting money from you before they send your loans to a law firm to file a student loan lawsuit against you.

Private lenders have limited collection powers in comparison to the federal government. For instance, once you default on a federal student loan, the U.S. Department of Education can automatically garnish your wages, take your tax refund, or offset your Social Security Benefits. However, until they sue you, private lenders can do none of those things. And even when they sue, private lenders have to win and get a judgment before they can garnish your wages or take money from your bank account (levy).

Can private student loans put a lien on your house? Student loans can put a lien on your house if you default and your lender sues you and gets a judgment. However, the loan holder typically won't force a sale of your home. Instead, it will keep the lien on your home until you sell or refinance. At that point, you'll have to pay your student loans to get rid of the lien.

How to fix defaulted private student loans

Until your loan charges off, your options to get your private student loan out of default or delinquency may include:

  • Requesting a forbearance. If granted, a forbearance will bring your account in good standing by adding the missed monthly payments onto your principal balance. As a result, your loan balance can be much higher due to interest capitalization.
  • Entering into a repayment agreement. Some lenders will allow you to enter into a temporary repayment plan to bring your account current. Usually, the required monthly payment is set high enough to cover the daily interest on the loans. Depending on your loan balance and interest rate, your monthly payment can be significant.
  • Negotiating a settlement. Many lenders are willing to settle private student loans that are in default. The settlement typically won't remove the late payment history from your credit report. But It may allow you to save thousands of dollars by negotiating a lump sum payment to release you and your cosigner from liability on the loan.  
  • Making the missed monthly payments. Most lenders will allow you to bring the loan back into good standing by making the missed payments.

Refinancing defaulted private student loans usually isn't an option. Lenders will check your history with all 3 credit bureaus before approving you for a new loan. You'll be hardpressed to find a lender willing to refinance a loan with a lack of on-time payments.

When does a private student loan charge off? Many private student loans charge off after 120 days of nonpayment. However, charge-off dates vary from lender to lender. For instance, Navient's charge-off date is typically around 150-180 days. Sallie Mae's and SoFi's are typically a little later.

Can you consolidate defaulted private student loans? You'll find it difficult, if not impossible, to consolidate or refinance defaulted private student loans. When you default, your credit score will take a hit, making it hard to qualify for consolidation/refinancing. Plus, many lenders are unwilling to refinance a delinquent or defaulted loan.

Should I default on my private student loans?

Defaulting on your private student loans may be your best option when:

  • you've run out of deferment and forbearance
  • you can't afford the repayment options your loan servicer is offering, and
  • you can't refinance.

Many borrowers have chosen to strategic default on their private student loans in hopes of negotiating a student loan settlement. As shared above, defaulting isn't without consequence. However, the benefit could be getting a settlement that saves thousands on your loan balance.

What happens when a student loan is charged off?

The original creditor will charge off a private student loan after you miss several months of payments. When that happens, the original lender will consider the student loan a loss and assign it to a collection agency to collect on the unpaid debt. Some lenders will also set the interest rate to zero so that interest stops accruing.

Private Student Loans and Coronavirus

Since the start of the COVID-19 pandemic, the federal government has suspended monthly payments and the interest rate for federal student loans. They've also stopped debt collectors from garnishing wages, taking tax refunds, and offsetting Social Security Benefits. However, they have not extended any of those benefits to private student loan debt — even for borrowers that are past due and facing financial hardship.

Looking for private student loan default help?

It can be equally frustrating and frightening when you're staring private student loan default in the face. You want to pay what you can afford, and you want to avoid hurting your cosigner's credit score. I've helped hundreds of borrowers like you do both of those things. Schedule a free 10-minute phone call to learn your options to resolve your private student loans for good.

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