Janice Lozano
Failing to pay your private student loan can have serious consequences. Private student loans often go into default when you miss monthly payments, and private lenders may report missed payments to credit bureaus after just 30 days. This can cause your credit score to drop significantly, making it harder to borrow money in the future. After 90 to 120 days of non-payment, your loan will enter default, which is a massive negative event on your credit report that stays there for seven years. Private lenders may attempt to collect your debt directly or hire collection agencies to do so, and they may also take you to court within the statute of limitations. It is important to take proactive steps and contact your lender as soon as possible to negotiate a new repayment plan or otherwise settle your debt.
| Characteristics | Values |
|---|---|
| Bankruptcy impact | Student loans, whether private or federal, cannot be included or dismissed in a bankruptcy unless you can prove permanent hardship. |
| Lender action | The lender can report your default to consumer reporting agencies, which could harm your credit score. They may also take different actions to collect the debt, such as hiring collection agencies or taking legal action. |
| Credit score impact | Missing a payment can cause your credit score to drop significantly, and continuing to miss payments will make the damage worse. A default on your loan will remain on your credit report for seven years. |
| Debt settlement | You may be able to negotiate with your lender to set up a new repayment plan or settle your debt through a lump-sum payment or a monthly payment plan. |
| Interest and fees | Interest will continue to accrue on your loan balance, and the lender may add late fees and other penalty fees for each missed payment. |
| Legal consequences | Private student loan lenders can take legal action and file a lawsuit against you for the full amount of the debt, plus fees and interest. |
| Co-signer impact | If someone co-signed your loans, their credit score can also be affected by missed payments. |
| Treasury Offset Program | Private student lenders cannot access this program, which collects past-due money owed to government agencies. |
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What You'll Learn
The impact on your credit score
Stopping payments on your private student loan can have a detrimental impact on your credit score and, by extension, your financial health. Your payment history is the biggest factor in your credit score. Once you miss a private student loan payment by 30 days, your lender will likely report it to the credit bureaus, causing your score to drop significantly. If you continue to miss payments, the damage worsens. After 90 to 120 days of non-payment, your loan will enter default, 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 borrow money in the future in the form of a car loan, a credit card, or a mortgage.
A lower credit score could make it tougher and more expensive to borrow money in the future. If someone, such as a parent, co-signed your loans, missed payments can hurt their credit score too. When you default on your loans, your whole loan balance is due immediately, and you lose the right to choose your federal repayment plan, giving you less control over how you pay off your debt. Private student lenders might also opt to open a lawsuit and bring you to court to collect what they're owed.
There are options to handle your student loan debt that don't involve a lawsuit or garnishment. Lenders sometimes offer short-term relief, like forbearance, if you are having temporary trouble making a payment. This only pauses your repayment plan, and interest often continues to grow, but it can provide breathing room. 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. Once paid, the debt is considered settled and resolved for good. A non-profit credit counselling agency can help you analyse your budget and finances and create a repayment plan to manage all of your debts.
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Late fees and growing debt
If you stop paying your private student loan, your loan balance will grow. For every missed payment, your lender will charge you a late fee. These fees add up quickly. Private lenders may report missing payments to credit bureaus after 30 days, which can cause your credit score to drop significantly. The longer you fall behind on payments, the more serious the consequences. After 90 to 120 days of non-payment, your loan will enter default. A default is a major 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 borrow money in the future.
Once the loan goes into default, things get even worse. The creditor can add collection costs and other penalty fees to your principal balance. Interest continues to accrue on the entire growing amount, causing your debt to spiral. Private student loans do not have the same protections or options as federal loans, so your lender may take legal action to force payment. They can file a lawsuit against you for the full amount of the debt, plus fees and interest. If you ignore the lawsuit, they will almost certainly be granted a default judgment against you.
Private student lenders cannot access the Treasury Offset Program, so they might opt to open a lawsuit and bring you to court to collect what they're owed. Defaulting on your loans could result in your debt being sold to a collection agency, which could charge you hefty collection fees. However, you have options to handle your student loan debt that don't involve a lawsuit or garnishment. Lenders sometimes offer short-term relief, like forbearance, if you are having temporary trouble making a payment. 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. Once paid, the debt is considered settled and resolved.
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Debt collection agencies
If you stop paying your private student loans, your loan will eventually be considered in default. The time it takes for this to occur varies, but it is usually sooner than the 270 days it takes for federal loans. Some private loans are considered to be in default after just 90 days of missed payments. Once your loan is in default, debt collection agencies will likely become involved.
Private lenders may attempt to collect your debt directly, or they may hire collection agencies to do so. These debt collection agencies will persistently contact you to get you to pay up. They could also charge you collection fees of up to 18.5% of your federal loan balance, and this could be far higher for private loans.
If you are worried you won't be able to pay your private student loan, contact your lender or servicer as soon as possible. You may be able to negotiate with your lender to set up a new repayment plan or otherwise settle your debt. For example, lenders sometimes offer short-term relief, like forbearance, if you are having temporary trouble making a payment. This only pauses your repayment plan, and interest often continues to grow, but it can provide breathing room.
Non-profit credit counselling agencies can also help you create a repayment plan to manage your debts.
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Bankruptcy
If you're considering bankruptcy as a way to discharge your private student loan debt, it's important to understand the process and potential challenges. Firstly, bankruptcy is often considered a last resort option due to its impact on your credit score and the costs and time involved in filing. While it is difficult to discharge student loan debt in bankruptcy, it is not impossible, and both federal and private student loans can be included.
To successfully discharge private student loans in bankruptcy, you must prove "undue hardship". This typically involves demonstrating that repaying your loans would cause a serious hardship that will continue for a significant portion of the repayment period. The Brunner Test, used by most states, sets the terms for the undue hardship standard. To pass, you must show extenuating circumstances that create a hardship, such as being over 65 or having a permanent disability. You must also prove that you've made a good-faith effort to repay your loans, which may include attempting to negotiate a repayment plan with your lender.
The type of bankruptcy case you file, Chapter 7 or Chapter 13, will impact the process. Chapter 7 involves cancelling all debt, but you must meet income requirements. Chapter 13 involves reorganizing and lowering your debt, and while there is no income requirement, you must stick to a repayment plan for 3 to 5 years. After filing for bankruptcy, you'll need to initiate an Adversary Proceeding, which is a separate legal process within your bankruptcy case. This requires substantial paperwork and evidence, such as income statements, medical bills, and proof of repayment attempts.
While bankruptcy can provide a fresh start, it's important to be aware of the potential risks and challenges. It is recommended to consult with an experienced bankruptcy attorney to understand your options and increase your chances of a successful discharge. Additionally, there may be other alternatives to manage your student loan debt, such as pausing payments through deferment or forbearance, or enrolling in an income-driven repayment plan.
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Lawsuits
If you stop paying your private student loan, your lender can report your default to consumer reporting agencies, which could harm your credit score. A lower credit score could make it tougher and more expensive to borrow money in future. The longer you fall behind on payments, the more serious the consequences. 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.
Private student loans do not have the same protections or options as federal loans, such as income-driven repayment or broad forgiveness programs. Private lenders may attempt to collect on your debt directly, or they may hire collection agencies to try to collect on your debt. They may also take you to court within the statute of limitations. If you ignore the lawsuit, they will almost certainly get a default judgment against you.
Private student lenders can't access the Treasury Offset Program, so they might opt to open a lawsuit and bring you to court to collect what they're owed. If you are worried you won't be able to pay your private student loan, contact your lender or servicer as soon as possible. You may be able to negotiate with your lender to set up a new repayment plan or otherwise settle your debt. Sometimes lenders offer short-term relief, like forbearance, if you are having temporary trouble making a payment. This only pauses your repayment plan, and interest often continues to grow, but it can provide breathing room.
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Frequently asked questions
If you stop paying your private student loan, your loan balance will grow. The lender will likely report missed payments to credit bureaus, which can cause your credit score to drop significantly. After 90 to 120 days of non-payment, your loan will enter default, which will have serious negative consequences on your credit report.
When your private student loan goes into default, your lender can take serious action. They may attempt to collect your debt directly or hire collection agencies to do so. They may also take you to court within the statute of limitations and file a lawsuit against you for the full amount of the debt, plus fees and interest.
If you are unable to pay your private student loan, contact your lender or servicer as soon as possible. You may be able to negotiate with your lender to set up a new repayment plan or otherwise settle your debt. Lenders may offer short-term relief, like forbearance, if you are having temporary trouble making a payment. A non-profit credit counselling agency can also help you create a repayment plan to manage your debts.
