Private Student Loan Default: What Happens Next?

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Updated on April 13, 2023

With private student loans, default is a common possibility. Many lenders consider a loan delinquent after the account is one month past due, but it’s not until 90 days of missed payments that they will officially classify the loan as being in default.

And for some borrowers, default is a foregone conclusion, predetermined by the fine print of their loan contracts.

These contracts may include clauses that trigger automatic default if the borrower or cosigner declares bankruptcy, defaults on another loan, or tragically passes away, according to a warning from the Consumer Financial Protection Bureau (CFPB).

Ahead learn more about private student loan default and, more important, what you can do if it happens to you.

Related: What Happens if You Default on a Sallie Mae Student Loan?

Can you default on private student loans?

Yes, it’s possible to default on private student loans. Defaulting on a loan means you have not made the required payments on time.

Many private lenders consider loans delinquent until more than three months have passed since the last required payment was made. Some lenders wait a few months longer.

Until your loans are in default, you may still have eligibility for unused deferment, forbearance time, and interest rate reduction payment plans that return your account to good standing and help lower your monthly payment.

Related: How to Get Student Loans Out of Default

Watch out for privately-held federal loans

If you have private student loans with Navient, American Education Services, or Nelnet, make sure you have a private student loan and not a privately-held federal student loan.

Student loan servicers, such as Navient, American Education Services, and Nelnet, service a type of loan known as Perkins Loans and Federal Family Education Loans, which are owned by private lenders and guarantee agencies.

These loans don’t qualify for the Covid-related forbearance options available for federally-held student loans, but they may be eligible for other federal benefits such as loan consolidation, income-driven repayment plans, and loan forgiveness.

To determine your loan type, visit the Federal Student Aid website,, and check the loan information provided there. If your loans are listed there, then they are federal student loans.

What are the consequences of defaulting on my private student loans?

Defaulting on private student loans can have serious consequences. Some of the potential consequences include:

  • Damage to credit score: Lenders tell the credit reporting agencies you defaulted, which can have a negative impact on your FICO credit score and make it more difficult for you to qualify for future credit, such as car loans, mortgages, credit cards, and even rental agreements. The late payments and default status will stay on your credit history for 7 years.

  • Difficulty in refinancing: Default can make it harder for you to refinance your loans, making it harder to lower your interest rate or change your repayment plan.

  • Collection calls and letters: Lenders may hire collection agencies or sell your loans to debt collectors to collect your debt, and this can result in calls and letters from collectors.

  • Legal action: The lender or loan holder may sue you to get a court order that may let it garnish your wages, take money from your bank account, or put a lien on your home.

  • Higher costs: Once in default, you may have to pay more fees, such as late fees, collection fees, court costs, and attorney’s fees.

Related: How to Get Rid of a Student Loan Judgment

Private student loans have fewer collection powers than the federal government

When it comes to collection powers, private student loan lenders have a significant disadvantage compared to their federal counterparts.

The U.S. Department of Education, for example, has broad authority to collect on defaulted federal student loans, including the ability to automatically garnish wages, seize tax refunds, and offset Social Security benefits. Private lenders, on the other hand, do not have this authority.

In the case of private loans, lenders must first sue borrowers and win a judgment before they can garnish wages or levy bank accounts. Even then, private lenders do not have the same powers as the government to seize assets or garnish wages without a court order.

This is an essential distinction for borrowers struggling to repay their loans. While defaulting on a private student loan can still lead to serious financial consequences, the collection process is different and, sometimes, less aggressive.

Related: Can Private Student Loans Take Your House?

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.

Can private student loans be charged off?

Yes, private student loans can be charged off. This occurs when a loan is unpaid for a certain period of time, and the lender has determined that it will not receive payment in full. At this point, the lender charges off the loan balance as a loss on its books.

Depending on the loan’s terms, lenders may also pursue collection efforts against the borrower.

What does it mean when a private student loan is charged off?

When a private student loan is charged off, it means the lender has determined that the borrower is unlikely to pay back the loan and has written it off as a loss. This happens typically after a borrower has been in default for an extended period of time, usually at least 180 days.

The lender will then sell or move the loan to a collection agency or file a lawsuit to recover the debt. The loan will also be reported as charged off to the credit bureaus, which will add to the negative impact on the borrower’s credit score already in place from the late payments that led to the default.

Do private student loans have a statute of limitations?

Private student loans are subject to a statute of limitations, which sets a time limit for creditors to take legal action against you for nonpayment.

Once the timeframe specified by the statute has passed, you’re no longer liable for the unpaid amount, and the lender is barred from taking you to court to collect on it. But they may still attempt to contact you and demand payment if they abide by relevant laws.

This timeline varies depending on your state’s laws and regulations and the loan terms in your promissory note.

For more information about specific loan statutes of limitations, speak with a student loan lawyer in your state.

Related: What Happens if I Don’t Pay Back Private Student Loans?

What happens when a private student loan goes to collections?

When a private student loan goes into collections, the debt collector may send letters or other correspondence demanding payment. Ignoring these warnings could result in serious financial consequences like wage garnishments or a lien being placed on your home.

But you don’t need to worry about your Social Security benefits, retirement pay, and tax refunds being taken to repay your defaulted student loans.

Those cannot be used to repay private student loan defaults. They can, however, be taken by the federal government to repay defaulted federal student loans.

Related: Can Private Student Loans Take Money From Your Bank Account?

California has special rules for private student loans in collections

In a move to curb illegal collection practices, California lawmakers enacted a law to hold them accountable for their actions. Under the Private Student Loan Collections Reform Act, debt collection agencies and lenders must disclose a comprehensive list of information to borrowers before collecting on unpaid private student loans.

This information is also necessary for filing a debt collection action in California State Courts, ensuring that student loan borrowers are informed and able to defend themselves against any wrongful collection attempts.

The Act also extends its protections to cosigners, guarantors, and others who may be held liable for unpaid private education loans. This is a significant step towards safeguarding the rights of borrowers and holding private lenders accountable for their actions.

How to get a private student loan out of default

There are several options to get a private student loan out of default, but keep in mind that most private lenders don’t have loan rehabilitation programs, will typically refuse to consolidate defaulted private student loans, and don’t offer loan forgiveness programs. These options include:

  1. Repayment plan. You can work with your lender to set up a repayment plan that fits your budget and lets you catch up on missed payments. You may even have options to lower your private student loan payments permanently.

  2. Refinance. You can refinance your defaulted loan into a new loan with Yrefy to get out of default with a fair interest rate and extended repayment term that makes your monthly payment more manageable.

  3. Settling the debt. You can negotiate with the lender to settle the debt for less than what you owe. Settling private student loan debt may save you 30-70% of the loan balance.

  4. Filing for bankruptcy. You can file a Chapter 7 or 13 bankruptcy case and ask the judge to discharge or eliminate your private student loan debt because repaying it would cause you undue hardship. Filing bankruptcy for private student loans is often the best choice if you can’t refinance or afford a settlement.

Contact your lender or the debt collection agency with your loans to discuss your repayment options.

Related: Can You Be Sued For Private Student Loan Debt?

Looking for private student loan default help?

It can be equally frustrating and frightening when you can’t afford your student loan payments. You want to pay what you can afford and avoid hurting your cosigner’s credit score.

I’ve helped hundreds of borrowers like you do both of those things. Schedule a call to learn your options to resolve your private student loans for good.

UP NEXT: Can SoFi Student Loans Be Forgiven?

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