Student loan default is becoming increasingly common, particularly among people with smaller student debt amounts. Did you take out a private student loan with the best of intentions, only to find yourself in over your head? You’re not alone. More than one million people every year struggle to keep up with their loan payments and fall into default.
In fact, by the end of 2018, approximately 11.5% of aggregated U.S. student debt was 90+ days delinquent or in default according to the Federal Reserve (source). But what happens once you go into default, and what should you do?
Read on to learn all you need to know about defaulting on a private student loan.
Can you default on private student loans?
Yes. Typically, private student loans are considered to be in default following three months of non-payment. However, each private lender has its own unique terms, so it’s important to read the details in your contract. It may call for the loan to go into default after one missed payment, or as many as four.
Additionally, even if you make your payments on time, your loan may go into default if one of the following situations occurs:
- A cosigner dies or goes bankrupt.
- You file for bankruptcy.
- You default on a separate loan.
- Your credit file undergoes a drastic change.
What is the student loan default rate?
The rate varies significantly depending on the loan amount. The overall default rate (90+ days delinquent) climbed to a new high of 11.4%, according to the latest data from the Federal Reserve. However, a third of all students who borrowed $5,000 or less default on their loans within 4 years. And nearly 40% of borrowers are expected to default by 2023, according to a recent report by the Brookings Institute (source).
Student default rates also vary widely by state. The graph below gives a detailed look at the delinquency rates by state.
Let’s say your loan has gone into default. What happens next?
What happens if you default on private student loans?
Once you default on your private student loan, the full balance of the loan usually becomes due immediately. Additionally, you can expect the following.
Lenders can garnish your wages if you default on your student loans. However, federal laws limit wage garnishments to the lesser of two figures: 25% of your disposable earnings, or the amount by which an employee’s disposable earnings are greater than 30 times the federal minimum wage (currently $7.25).
The lender will begin to pursue you for full repayment. If you have a cosigner, your lender will also pursue them. They will usually send you multiple notices and contact you by phone.
Student loan default and debt collectors
If your lender can’t collect from you or reach you to make an agreement, they may hand your account over to a debt collector. In this case, the debt collector will contact you and your cosigner to demand payment. This will be quite stressful, as these demands can be very aggressive.
Damage to your credit score
Your lender can also report your default to the credit bureaus. This will have a negative impact on your credit report and credit score, as well as to your cosigner’s score (if you had one). Negative records stay on credit reports for seven years.
Additional fees and penalties
Your debt might also accrue additional feels, like late fees and collection charges. This can drastically increase how much you owe.
Your lender can also sue you and your cosigner in an effort to collect the debt. If they do so and receive a court judgment, they can get permission to garnish your wages.
Wage garnishment for private student loans can take to up to 25% of your income, varying by state. If you don’t earn regular employment wages, the lender or collector can get an order for non-wage garnishment, which allows them to seize assets (like bank accounts).
Bankruptcy and statute of limitations
What if you can’t pay? Private student loan defaults are very difficult to discharge in bankruptcy. However, they are deemed uncollectible when the debt exceeds the statute of limitations. The time limit can range from three to ten years, depending on which state you live in.
What should you do when you default on a private student loan?
Consider the following options.
Pay off the loan
Ideally, you’ll pay off your loan in full. This will settle the debt, stop all collection efforts, and stave off any legal action. And if you pay your debt before your default is reported to the credit bureaus, you can avoid negative impacts to your report and score.
But if you’ve already defaulted on your loan, you likely don’t have the savings to cover it in full. So how can you pay off your debt? Here are a few options:
- Ask for a loan from friends or family members. Tread carefully here — if you’re unable to pay off the debt, it will hurt your relationship.
- Refinance the loan with another lender. Here are a few of the top student loan refinancing companies:
- Do you have a home? If so, cash out some of your home equity to pay off the balance. However, if you default on this loan, your home will be at risk. Be sure to only take this option if you’re confident that you can pay it off on time.
If you’re unable to secure the money you need to pay off your loan, here are some other options.
Settle the debt
If your loan is in collections but does not yet have a court ruling, you may be able to negotiate an agreement to pay less than the amount owed. Figure out how much you can afford to pay. Often, you can split up the settlement payments over three months.
Go into the conversation with a budget in mind and try to come to an agreement with the collector. If they think your offer is their best shot at collecting at least some of the debt, they might just take it. However, be sure that you can follow through on any agreement you make.
Loan rehabilitation programs let you reinstate a loan from default by making good faith payments. Can you rehabilitate a defaulted private student loan? Sometimes. Unlike federal student loans, private student lenders do not have to offer rehabilitation programs. However, some do.
If in doubt, be sure to call and ask. If you successfully rehabilitate your loan from default, you can ask your lender to remove the default from your credit report. They don’t have to, but they can. If they do, any late payments that you made prior to the default may remain on your credit report.
Hire legal help
When you go into default on a private loan, it can have consequences that impact your daily life. To protect yourself, your paycheck, and your assets, it may be in your best interest to hire a lawyer who specializes in student loans. They can help you to navigate the complex landscape of loan defaults and help you make the best decisions for your situation.
What laws regulate private student loan defaults?
Below, you can read about the laws that come into play when dealing with private student loan defaults.
Removing defaults after rehabilitation
The Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) amended the Fair Credit Reporting Act to allow for the removal of defaults from credit records if a borrower successfully rehabilitates their private student loan. The lender does not have to do so, but they have the option.
What are the statute of limitations on private student loans by state?
The statute of limitations laws set time limits on how long a private student loan lender can sue a borrower for repayment of the debt. The time limits vary by state. Here is a more detailed breakdown of the statute of limitations by state. Notice the statute of limitations can vary based on the type of private student loan, when you borrowed the money, and the state you live in.
The Federal Wage Garnishment Law, found in the Consumer Credit Protection Act (CCPA), outlines the circumstances under which wages can be garnished and the percentage of your monthly income that can be taken.
Title III sets the maximum amount that may be garnished in any workweek or pay period. For ordinary garnishments (i.e., those not for support, bankruptcy, or any state or federal tax), the weekly amount may not exceed the lesser of two figures: 25% of the employee’s disposable earnings, or the amount by which an employee’s disposable earnings are greater than 30 times the federal minimum wage (currently $7.25 an hour).
Debt collection etiquette
The Fair Debt Collection Practices Act (FDCPA) outlines proper etiquette for debt collectors. For example, borrowers can tell the debt collector to stop contacting them about the debt and they must oblige. However, collectors can still reach out to communicate about specific actions being taken in relation to the debt.
The Act also lays out when debt collectors are allowed to contact a debtor. Also, it states that you cannot be arrested for failing to pay a “civil debt” like a student loan.
Student loans and bankruptcy
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it very difficult to discharge student loans, both private and federal. However, it is still possible to discharge them if the individual can prove they cause undue hardship.
What if you don’t agree with the amount owed?
If you defaulted on a private student loan but don’t agree with the amount that a debt collector says you owe, you have 30 days from the initial communication to dispute it. If you file a dispute in this time frame, it will put collections on hold.
According to the law, you must contact the lender and ask them for proof that you are legally required to pay the debt. If they send proof and it doesn’t match your records, you can then contest that you do not owe the amount or that the debt doesn’t belong to you. Example letters can be found on the Consumer Financial Protection Bureau (CFPB) website.
How can you avoid defaulting on a private student loan?
If at all possible, it is best to avoid defaulting on a private student loan. You can do this when you first realize you are unable to make a payment. Instead of just skipping the payment, reach out to your lender proactively and communicate about it.
Many lenders have deferment and forbearance programs for people who are going through a rough patch. They may give you a pass for a set time period, or temporarily lower your payment amount.
Additionally, if you’re struggling to make payments, refinancing before you are late on a payment will give you a better chance of getting approved.
If you defaulted on your private student loan and are unable to come up with the money in a lump sum, refinancing is your best bet. Of course, getting approved for refinancing or consolidation is not a sure thing. Defaulting on a private student loan may hurt your credit to the point that you can’t get approved, though this is not always the case.
Wondering if you can get approved? Find out by getting pre-approved to refinance your student loans here. It won’t hurt your credit score and just takes a few minutes. Compare offers side-by-side to find the best option for your needs.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.