If you have taken out private student loans to pay for your education, you may be wondering what happens if you default on them. Defaulting on any type of debt can have serious consequences, but private student loans are especially risky because they have fewer protections and options than federal student loans. In this article, we will explain what happens if you default on private student loans, how to avoid it, and how to recover from it.
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What Is Private Student Loan Default?
Private student loan default is when you fail to make your required monthly payments on your private student loans. The definition of default may vary depending on your lender and your loan contract, but typically, private student loans go into default after you miss three consecutive monthly payments (90 days). However, some lenders may declare your loan in default sooner or later, or for other reasons, such as dehttps://bestcreditcards3.com/college-ave-student-loans/claring bankruptcy, defaulting on another loan, or dying.
What Happens If You Default on Private Student Loans – Consequences of Private Student Loan Default?
What Happens If You Default on Private Student Loans? Defaulting on your private student loans can have serious and long-lasting consequences, such as:
- Damage to your credit score: Your lender or servicer will report your default to the credit reporting agencies, which will lower your credit score and make it harder for you to get approved for other loans, credit cards, mortgages, or even rent an apartment in the future. A default can stay on your credit report for up to seven years.
- Collection efforts: Your lender or servicer may attempt to collect the debt from you directly, or they may hire a collection agency to do so. You may receive frequent phone calls, letters, or emails demanding payment. You may also be charged late fees, collection fees, and interest on your outstanding balance, increasing your debt.
- Legal action: If your lender or servicer cannot collect the debt from you, they may sue you in court. If they win the lawsuit, they may obtain a judgment against you, which will allow them to garnish your wages, seize your bank accounts, or place a lien on your property. A judgment can also stay on your credit report for up to seven years, or longer if it is renewed.
- Loss of benefits: Unlike federal student loans, private student loans do not have any benefits such as deferment, forbearance, income-driven repayment, or forgiveness. If you default on your private student loans, you will lose any benefits that your lender or servicer may have offered you, such as a lower interest rate, a grace period, or a cosigner release. You will also lose the opportunity to refinance your private student loans with another lender at a lower rate or better terms.
How to Avoid Private Student Loan Default?
The best way to avoid private student loan default is to make your monthly payments on time and in full. However, if you are struggling to afford your payments, you should contact your lender or servicer as soon as possible and explain your situation. You may be able to negotiate with them to set up a repayment plan that works for you, such as:
- Lowering your monthly payment: Some lenders may allow you to temporarily reduce your monthly payment by extending your repayment term, lowering your interest rate, or switching to an interest-only payment. However, this may increase the total amount of interest you pay over the life of the loan.
- Pausing your payments: Some lenders may allow you to temporarily pause your payments for a certain period of time, such as six months or a year, if you are facing a financial hardship, such as unemployment, illness, or natural disaster. However, this may not stop the interest from accruing on your loan, and you may have to pay a fee to resume your payments.
- Settling your debt: Some lenders may allow you to settle your debt for less than the full amount you owe, if you can make a lump-sum payment or a series of payments within a short time frame. For example, if you owe $20,000, you may be able to pay $15,000 and have the rest of your debt forgiven. However, this may have tax implications, as the forgiven amount may be considered as income by the IRS. You may also have to pay a fee to settle your debt, and your credit score may still be affected.
How to Recover from Private Student Loan Default?
If you have already defaulted on your private student loans, you may still have some options to recover from it, such as:
- Rehabilitating your loan: Some lenders may offer you a chance to rehabilitate your loan, which means that you agree to make a series of on-time payments, usually for nine to 12 months, to bring your loan back to good standing. If you successfully complete the rehabilitation program, your lender may remove the default from your credit report and restore your original loan terms and benefits. However, not all lenders offer this option, and you may only be able to rehabilitate your loan once.
- Consolidating your loan: Some lenders may offer you a chance to consolidate your loan, which means that you take out a new loan to pay off your defaulted loan. If you qualify for a consolidation loan, you may be able to get a lower interest rate, a longer repayment term, or a single monthly payment. However, this may not remove the default from your credit report, and you may have to pay a fee to consolidate your loan. You may also need a cosigner or a good credit score to qualify for a consolidation loan.
- Declaring bankruptcy: As a last resort, you may consider declaring bankruptcy to discharge your private student loans. However, this is very difficult and rare, as you have to prove that repaying your loans would cause you “undue hardship”, which is a very high standard to meet. You will also have to hire a lawyer and go through a lengthy and costly legal process. Moreover, bankruptcy will severely damage your credit score and stay on your credit report for up to 10 years.
Conclusion – What Happens If You Default on Private Student Loans
Defaulting on your private student loans can have serious and long-lasting consequences, such as damage to your credit score, collection efforts, legal action, and loss of benefits. Therefore, it is important to avoid defaulting on your private student loans by making your monthly payments on time and in full, or by contacting your lender or servicer to negotiate a repayment plan that works for you. If you have already defaulted on your private student loans, you may still have some options to recover from it, such as rehabilitating your loan, consolidating your loan, or declaring bankruptcy. However, these options may not be available or suitable for everyone, and they may have their own drawbacks and risks. Therefore, it is advisable to seek professional advice from a financial counselor, a lawyer, or a tax expert before making any decisions regarding your private student loans.