What Happens When You Default On A Private Student Loan
The best way to avoid defaulting on a private student loan is to stay on top of your payments. Learn how to do that here.
Table of Contents
- What is Defaulting on Private Student Loans?
- What Happens When you Default?
- What To Do If You Have Defaulted?
- How to Avoid Defaulting on a Loan?
- Final Thoughts
There is a difference between late payments and defaulting on your private student loan. Defaulting on a private student loan is when you have failed to make payments for 270 days and the lender declares your loan delinquent. If you think you have defaulted on your student loan, you must contact the lender immediately otherwise it could have serious consequences. The effects could include legal action from the lender, higher interest rates, or damage to the credit report. It’s important to avoid defaulting if at all possible, as it can have long-lasting negative consequences. Fortunately, there are ways you can prevent default and make sure your loans stay in good standing. Read below to learn what default means in detail, its consequences, and the steps you can take to avoid it.
What is Defaulting on Private Student Loans?
The easiest way to understand what defaulting means is when you have failed to make payments for 270 days and the lender declares your loan delinquent. A few late payments do not fall under defaulting. The explanation of when the lender considers your loan defaulted should also be given on your loan agreement.
Difference Between Default and Delinquency
It is important to understand the difference between delinquency and default as it can be confusing. Delinquency means when you miss payments on your loan and are overdue while defaulting is when the lender has declared the loan delinquent after 270 days of missed payments. Defaulting can have more serious consequences than delinquency so make sure to communicate with your lender on a regular basis in case you have missed any payments.
What Happens When you Default?
Defaulting on a loan has immediate and longterm consequences. These can range from an effect on the credit score to legal action.
There are immediate consequences of defaulting on a private student loan which includes:
- Damage to your credit report – Defaulting will damage your credit score, which can make it difficult to qualify for future loans and other forms of credit.
- Legal action from the lender – The lender may take legal action against you if you default, such as wage garnishment or seizure of tax refunds.
- Higher interest rates – Defaulting on your loan could result in an increase in the loan’s interest rate, making it more expensive to pay back over time.
- Difficulty getting back on track financially – Once you default on your loan, it can be difficult to get back on track financially.
- Collection calls and letters – you may receive numerous letters and calls from collections officers that will create pressure for you to pay.
- Penalties – Lenders will charge late fees and penalties on your next due payments.
Apart from the immediate consequences, there are long-term effects of defaulting which can include:
- Deferred wages – Defaulting could result in your wages being deferred, making it difficult to cover living expenses or pay off other debts.
- Difficulty qualifying for additional loans – Defaulting on your loan will damage your credit score, which can make it difficult to qualify for future loans.
- Lower credit limit – Your credit limit may be reduced, making it harder to borrow money in the future or get approved for larger purchases.
- Difficulty finding a job – Defaulting on a student loan could affect your ability to find employment as some employers may view it as a negative mark on your credit report.
What To Do If You Have Defaulted?
If you think you have defaulted on your loan you should take some necessary steps to prevent serious and longterm consequences.
- Contact your lender or Servicer: Contact your lender to explain your situation and work out an alternative payment plan.
- Check for forbearance or deferment: Review any forbearance or deferment options available that could help you avoid defaulting on your loan.
- Review options of consolidation or refinancing: Consider consolidating loans if payments are unmanageable.
- Try Budgeting with counselors: Seek help from a credit counseling agency for budgeting and financial concerns.
- Regularly communicate with lender: Take action quickly and regularly communicate with your lender to avoid the long-term consequences of defaulting on your loan.
How to Avoid Defaulting on a Loan?
– Understand the terms of your loan:
Make sure you understand all the terms and conditions of the loans to avoid any payment confusions
– Create a budget and stick to it:
Create a monthly budget and stick to it. This will help you manage your loan payments.
– Consider deferment or forbearance options:
If your financial situation changes or becomes more difficult, you can look into options like deferment or forbearance to temporarily pause your payments until you get back on track.
If necessary, consider consolidating your loans in order to lower the monthly payment amount and make it easier to manage.
– Explore alternative payment plans:
You can explore options like income-driven repayment plans to help manage your monthly payments.
– Set automatic payments:
To avoid being late you can set up automatic payments from your bank account.
Can student loans be forgiven if in default?
No, student loans cannot be forgiven if they are in default. However, it is possible to renegotiate the terms of the loan or use various options such as deferment or forbearance to avoid default and make payments more manageable.
How do I clear my defaulted student loans?
The best way to clear your defaulted student loans is by working with your loan servicer. They can help you explore options for getting out of default, such as consolidation or rehabilitation. It’s important to take action quickly and be proactive in order to avoid the long-term consequences of defaulting on a loan.
What will happen if I default on my private loan?
If you default on your private loan, the lender may take legal action against you. This could include wage garnishment or seizure of tax refunds and damage to your credit report that could make it difficult to qualify for future loans. Defaulting will also lead to higher interest rates and increased difficulty in getting back on track financially.
In conclusion, defaulting on a private student loan can have serious consequences that could affect your financial wellbeing for years to come. It is important to take action quickly and be proactive in order to avoid the long-term effects of defaulting on a loan. If you’re worried about defaulting on your student loan, consider exploring options like deferment or forbearance as well as consolidating your loan to make payments more manageable.