Douglas Olsen
Failing to pay private student loans can have serious consequences, including penalties, increased debt, and damage to your credit score. Private student loans do not offer the same protections as federal loans, and lenders can take legal action to force repayment, including filing lawsuits and garnishing wages. Ignoring the problem will only make it worse, and it's important to proactively seek solutions, such as negotiating with lenders, exploring hardship policies, or seeking credit counselling. Understanding the specific terms of your loan and taking timely action are crucial steps to mitigate the potential negative impact on your financial well-being.
| Characteristics | Values |
|---|---|
| Bankruptcy impact | Student loans, whether private or federal, cannot be included or dismissed in a bankruptcy unless you can prove permanent hardship. |
| Delinquency | Missing a payment can put the loan into delinquency, which may incur late fees and penalties. |
| Interest accrual | Interest can accrue on penalties and the unpaid principal loan amount, increasing the debt. |
| Default | Missing too many consecutive payments can lead to default, which has serious consequences. |
| Credit score impact | Defaulting on a loan can significantly drop the credit score, making it harder to take out loans or achieve financial goals like buying a house. |
| Collection efforts | The original creditor will increase collection efforts, including persistent phone calls and letters. |
| Debt selling | The creditor may sell the debt to a third-party debt collection agency, whose only job is to collect the unsecured debt. |
| Lawsuits | Private creditors can file lawsuits to force payment, and if ignored, they will likely get a default judgment, allowing them to collect the debt through methods like wage garnishment. |
| Grace period | Some private student loan companies offer in-school deferments and grace periods, but it depends on the repayment terms of the loan agreement. |
| Repayment plans | Private student loan lenders may allow negotiations for new repayment plans or settlements. |
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What You'll Learn
Your credit score will be damaged
Your credit score is a number calculated based on information in your credit report. Payment history is the biggest factor in your credit score. As such, missing payments on student loans can negatively affect your credit score. Even one missed payment can lower your credit score, and late payments can stay on your credit report for up to seven years.
Once you miss a private student loan payment by 30 days, your lender will likely report it to the credit bureaus. This single action can cause your score to drop significantly. If you continue to miss payments, the damage gets worse. After 90 to 120 days of non-payment, your loan will enter default. A default is a massive negative event on your credit report that stays there for seven years. This drop in your credit score has real consequences, making it harder and more expensive to get a car loan, a credit card, or a mortgage.
If you're late with or miss a single payment, it may not affect your credit score depending on the loan type and how long it takes for you to make the payment. Typically, you have up to 30 days beyond the payment due date to pay before the missed payment is recorded on your credit report. Subsequent reporting will occur at the 60- and 90-day marks, and these can have a drastic impact on your credit score.
Your credit score affects the likelihood of approval for different types of loans and credit cards. Lenders use your credit score to help determine whether they'll approve you for a loan and under what terms. A lower credit score may make it difficult to qualify for new credit cards, mortgages, car loans, apartment rentals, and even cell phone contracts.
However, it's important to note that student loans can also help build your credit score. They are a type of installment loan that appears on your credit report. As a result, they can play an important role in helping you build a credit history. Repaying your student loans on time will strengthen your credit score.
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Lenders may sue you
Private student loan lenders may sue you if you default on your loan. Before a lawsuit, your loan will go through a process that begins with delinquency, which occurs when you are more than 30 days late on a payment. Delinquency can incur late fees and penalties, and interest may accrue on these fees and the unpaid principal loan amount. If you miss too many consecutive payments, your loan will go into default. Defaulting on a private student loan means the entire loan balance becomes due, and the lender may send your loan to a collection agency.
Once your loan is in default, your original creditor will increase their collection efforts, such as through a constant stream of phone calls and letters. If they cannot get you to make a payment, they will sell your debt to a third-party debt collection agency, whose only job is to collect the debt you owe. After selling the debt, the original creditor no longer has the right to sue you.
If the third-party debt collector cannot get you to pay, they may file a lawsuit against you to recover the debt. They will need to prove that they own the debt and that it is your debt. There is a time limit on private student loan collections, which is usually six years after you last made a payment or took action on the account. However, some private student loan contracts have different rules and time limits that might apply. If you are sued by your student loan lender, you will receive a summons to appear in court.
If you ignore the lawsuit, the lender will almost certainly get a default judgment against you. A court judgment gives the creditor new ways to collect what you owe, such as wage garnishment or seizure of assets. However, there are options to handle your student loan debt that do not involve a lawsuit or garnishment. Sometimes lenders offer short-term relief, like forbearance, if you are having temporary trouble making a payment. Debt settlement is another option, where you or a representative negotiate with the creditor to accept a one-time, lump-sum payment that is less than your total balance.
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Wage garnishment
At this point, your creditor or the debt collection agency may pursue legal action to force repayment. They can file a lawsuit against you for the full amount of the debt, plus fees and interest. If you do not respond to the lawsuit, they will likely receive a default judgment in their favour. With this court judgment, the creditor can request a writ of garnishment from the court.
A writ of garnishment is a court order directing your employer to withhold a portion of your earnings and send it directly to your creditor. Specifically, the U.S. Department of Education can garnish up to 15% of your disposable income, ensuring that you are left with at least 30 times the federal minimum hourly wage ($7.25) per week, which equates to $217.50. It is essential to note that your employer is not allowed to terminate your employment due to wage garnishment.
Before wage garnishment takes effect, you will receive a 30-day notice, during which you have the right to request a hearing before an administrative law judge. This period provides an opportunity to explore alternative options to resolve your debt and avoid garnishment. It is advisable to take proactive measures and seek assistance to manage your student loan debt and prevent wage garnishment, as it can significantly impact your financial situation.
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Bankruptcy won't clear your debt
If you're struggling to pay off your private student loans, you may be wondering if bankruptcy is an option. While bankruptcy can be a solution for overwhelming debt, it's important to know that it won't automatically clear your private student loan debt. Here's why:
The Adversary Proceeding
To discharge private student loans in bankruptcy, you must file an "adversary proceeding." This is an additional legal proceeding on top of your bankruptcy case, and it is like a civil lawsuit. In this proceeding, you must prove that paying off the loan would cause you "undue hardship." This term has a specific definition in bankruptcy law and is determined using the Brunner Test. Essentially, you must show that you cannot maintain a basic standard of living if you have to continue paying off the loan.
The Qualified Education Loan
Not all private student loans are treated equally in bankruptcy. For a loan to be considered a "qualified education loan," it must be used solely for "qualified higher education expenses." These expenses typically include tuition, books, room, and board at an eligible educational institution. If your loan is not considered a qualified education loan, it may be treated as a personal loan, which can make it even more challenging to discharge in bankruptcy.
The Impact on Your Credit Score
Bankruptcy is considered a last resort because of its potential negative impact on your credit score. A bankruptcy filing will remain on your credit report for several years, affecting your ability to take out loans or achieve financial goals like buying a house. Additionally, late payments and loan delinquency can also damage your credit score, making it crucial to explore other options before considering bankruptcy.
The Availability of Other Options
Before considering bankruptcy, it's important to explore alternative options for managing your private student loan debt. These can include short-term relief measures offered by lenders, such as forbearance or deferment, or negotiating a settlement with your loan holder. Non-profit credit counseling agencies can also help you create a budget and a repayment plan to manage your debts more effectively.
In summary, while bankruptcy can be a viable option in rare cases, it is not a guaranteed solution for private student loan debt. The process is complex, and you must meet specific criteria to have your debt discharged. Therefore, it is essential to seek legal advice from an experienced bankruptcy attorney and explore all available alternatives before making any decisions.
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Late fees and penalties
The late fees and penalties can add up quickly. For example, federal loan late fees are typically 6% of the late payment amount. Additionally, if your payment is 90 days late, the loan servicer can report the late payments to major credit bureaus, which can significantly impact your credit score and make it more difficult to secure loans or achieve financial goals in the future.
If you continue to miss payments, your loan will eventually enter default. Defaulting on a loan has serious consequences, including a negative mark on your credit report that can stay there for up to seven years. This can make it harder and more expensive to obtain other forms of credit, such as car loans, credit cards, or mortgages.
Once your loan is in default, your original creditor may increase their collection efforts, including frequent phone calls and letters. They may also sell your debt to a third-party debt collection agency, which can result in persistent attempts to collect the unsecured debt. Private lenders may also take legal action to force payment, including filing a lawsuit against you for the full amount of the debt, plus fees and interest. Therefore, it is essential to stay on top of your payments and seek assistance when needed to avoid these late fees and penalties.
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Frequently asked questions
Missing a student loan payment can put your loan into delinquency, and may incur late fees and/or penalties. Interest can accrue on unpaid amounts, increasing your debt. If you miss too many consecutive payments, you may default on the loan. Defaulting on your loan can have serious consequences for your financial well-being, including damage to your credit score and long-lasting negative impacts on your credit report.
Your original creditor will likely ramp up collection efforts, including persistent phone calls and letters. If you still don't pay, they may sell your debt to a third-party debt collection agency, which will continue the pursuit of payment. Your lender can also take legal action to force payment, including filing a lawsuit against you for the full amount of the debt, plus fees and interest.
If you're having temporary trouble making a payment, your lender may offer short-term relief, like forbearance. Debt settlement is another option, where you negotiate with the creditor to accept a one-time, lump-sum payment that is less than your total balance. Non-profit credit counselling agencies can help you create a repayment plan to manage your debts. If you're experiencing a financial emergency, talk to your lender to see if you're eligible for their financial hardship policies.
Student loans, whether private or federal, typically cannot be included or dismissed in a bankruptcy. However, there is a mechanism in place to discharge student loans in bankruptcy if you can prove permanent hardship, such as being permanently disabled.
