Defaulting on a private student loan is not the same as defaulting on a federal student loan. A private student loan is considered to be in default after three months of non-payment while a federal student loan is considered to be in default after 270 days of non-payment.
The federal government also has much stronger powers to compel repayment than private lenders. Nevertheless, private lenders have several powerful tools to seek repayment. The main difference is they have to file a lawsuit against the borrower and get a court judgment first.
Consequences of defaulting on a private student loan include:
- The lender will demand immediate payment of the full balance of the loan.
- The lender will start seeking repayment from any cosigner of the loan. Often, lenders will seek repayment from the cosigner when the borrower is late with a payment, not waiting for default. Even if the cosigner starts making payments on the loan, the borrower is also still responsible for the debt.
- The lender may refer the borrower’s account to a debt collector, which will result in frequent collection calls and dunning letters, notifications from a lender to prod past-due customers to make a payment. These demands for payment can cause a lot of stress for the defaulted borrower and his or her family. The Fair Debt Collection Practices Act (FDCPA) allows borrowers to tell the debt collector to stop contacting them about the debt. The debt collector can still contact the borrower to tell him or her about specific actions they are taking, such as filing a lawsuit, but, otherwise, most of the harassment will stop.
- The lender may report the defaulted loan to credit bureaus, damaging the credit history and credit scores of both the borrower and cosigner. This may make it difficult for the borrower and cosigner to get other forms of consumer credit, such as credit cards, auto loans and mortgages, and may result in higher interest rates on the borrower’s and cosigner’s debts.
- The lender can add collection charges to the amount owed, which typically will increase the loan balance by 25% to 40%.
- The lender may sue the borrower and/or cosigner to collect the debt.
- If the lender gets a court judgment against the borrower or cosigner, the lender can obtain a wage garnishment order. Unlike administrative wage garnishment for defaulted federal student loans, which are limited to 15% of disposable pay, wage garnishment orders for private student loans can be up to 25%, depending on the state.
- If the lender gets a court judgment against the borrower or cosigner, the lender may be able seize assets (e.g., financial levies on bank accounts) and place liens against property owned by the borrower or cosigner.
- Private student loans, like federal education loans, are almost impossible to discharge in bankruptcy.
Unlike federal education loans, private student loans may be subject to a statute of limitations, which limits the amount of time during which the lender can collect a loan. Statutes of limitation vary by state. Lenders also have several methods for restarting the clock on a statute of limitations.