Defaulting on a private student loan is a serious issue that can have a major negative impact on your credit score. Knowing your rights and working fast to resolve the issue with your lender is critical to managing the consequences of default.
Private student loans don’t offer the same protections for borrowers as federal student loans, and defaulting can have serious consequences:
- Your full balance is due immediately
- The debt becomes part of your credit history for seven years
- Borrowers and cosigners will get calls from collection agencies
- You could face hefty fines
- The company making the loan could sue you
- A court could garnish your wages or seize your assets
When your loan enters default, the full balance of the loan is due immediately. Here are the three primary options available to students to reach a more realistic resolution.
Student Loan Repayment Assistance
One option is to ask your lender about repayment assistance options. Some lenders may be willing to temporarily suspend your loan repayment obligations – forbearance – or reduce your monthly repayment. Your lender may be willing to work with you if you can prove your inability to pay is due to a short-term issue that is beyond your control.
When you refinance a loan, you’re taking out a new loan to cover the cost of your existing loan. Newer loans sometimes offer better terms than pre-existing loans, so refinancing could be a good option if you’re struggling to meet your monthly payments.
If you’re already in default, you may have a difficult time getting your lender to give you a new loan, so you may need a cosigner.
Settle Your Loan
If your private student loan default has reached collections, you may be able to convince the collection agency to settle your loan. Reach out to the collections agency and ask them how much it would cost to settle your loan and wipe it from their books. Usually, they’ll ask for at least 50% of the remaining amount owed, with the rest being forgiven.
You will be required to pay the settlement amount upfront, so this is unlikely to be a realistic option if you are already in default.
Other Steps to Take
Dispute Your Debt
If you don’t believe that you are in default, you are entitled to dispute your debt with your lender. If you submit a request within 30 days of your default notification, they are legally required to provide you with sufficient information to verify that you are in fact in default.
If you believe that your lender is mistaken, or if you are being sued by the lender or collection agency, there are plenty of lawyers who specialize in student loan default.
Work Quickly to Resolve the Issue
Once notified that your loan is in default or collections, you should immediately get to work to resolve the issue. If you act fast, you’ll be able to minimize the damage to your credit score.
Both lenders and collection agencies have an incentive to work with you on loan repayment: they want their money back. Despite the gravity of the situation, you may find that your lender or the collection agency is more flexible than expected.