What Happens When You Default on a Private Student Loan?

As of March 2021, private student loan debt amounted to $136.3 billion. This type of debt is often less affordable than federal student loans. Default under a private lender begins as early as missing three monthly payments.

Going into private student loan default comes with significant consequences, including collections and even lawsuits. 

If you’re struggling to pay your student loans, it’s crucial to take action to prevent further damage. Contact your lender as soon as you realize you cannot make an on-time payment. Even if it can’t offer an adjustment to your payments, this shows a good-faith effort on your part.

In this guide:

• How do I know whether my private student loan is in default?
• What will happen to me if I default on my private student loan?
• What will my private lender do if I default?
• Do I have to pay back my private student loan if it’s in default?
• Will lenders work with borrowers who are in default?
• Does it ever make sense to default on my private student loan?
• Can I get my private student loans out of default?

How do I know whether my private student loan is in default?

The terms delinquency and default can seem similar, but the differences between the two are important. 

Delinquency on private loans starts once you’re a day or more behind on payment. This is when you’ll often find your payment reported as late to the credit bureaus. You might also get mail or email notifications requesting payment. 

Default is much more serious for private student loan borrowers. The Consumer Financial Protection Bureau (CFPB) states defaulting on private student loans happens after three missed payments, or 90 days. And with some private lenders, your loan defaults after the first missed payment—much less than the 270 days federal student loans offer before default. 

Default doesn’t just stem from missed payments under a private loan. Depending on the policies and conditions within your loan agreement, you could be placed in default for the following reasons: 

• Death of a cosigner
• Bankruptcy (even if it doesn’t include your student loan)
• Defaulting on another debt (such as a credit card or auto loan)

Not all private loan servicers have these conditions, but if yours does, you’ll find them in your loan agreement. 

How can you tell if your student loans are in default? 

Telltale signs include the following: 

• Collection attempts or phone calls
• Changes to your credit report
• Collections fees added to your loan account
• Legal notices

If you think you might be close to or in private student loan default, it’s time to contact your loan servicer for options to get back in good standing. 

What will happen to me if I default on my private student loan?

Defaulting on your private student loans has significant consequences. That’s why it’s essential to come to a solution as soon as possible. 

Damage to your credit score

Late payments and default can destroy your credit score. It may take years to repair after default. 

Added fees 

When you default, extra charges, such as late fees and collections fees, are added to your principal loan balance. Collections fees are often at least 20% of your monthly payment. 

For example, If your monthly payment is $500, and you’ve missed three months’ worth of payments ($1,500), you could see a fee of $300 added to your principal. It will take longer to pay off your loan, and interest can affect the fee. 

Negative effect on your cosigner’s credit score

When you don’t meet the payment obligations on a loan someone else helped you qualify for, their credit gets ruined alongside yours. That could cause interpersonal issues in addition to financial problems. 

Withheld academic transcripts

Some universities won’t release your transcripts until your student loans are current. 

Legal action

Since private loans don’t have the same resources to collect the debt as the federal government, they rely on legal action. If the judgment is in their favor, it may result in wage garnishment or a lien on your property. 

Unlike federal loans, you won’t have rehabilitation options available. That makes it even more important to get a handle on your repayment. 

What will my lender do if I default on my private student loan?

Private lenders have fewer methods of recourse when you default on your student loans, but that doesn’t stop them from trying to get their money back. 

Here’s what your lender could do if you default on a private student loan:

• Add fees to your loan balance
• Report your default to the credit bureaus
• Send your account to a collections agency
• Require you to pay the entire balance
• Sue you to garnish your wages, or institute a lien

Federal lenders, in comparison, can garnish your wages without legal action, intercept your tax refund, or withhold government income payments. Those are effective ways to motivate student borrowers to repay their balance. 

Private lenders pursue repayment differently. For example, Sallie Mae requires defaulted borrowers to pay the total balance and reports the default to credit agencies. 

For most private lenders, legal action is the last resort. Going to court is expensive, so they avoid it unless other methods don’t work. 

It often takes years for private lenders to take legal action. Once they reach that point, they’ll push for wage garnishment or a property lien to recoup their money. 

Do I have to pay back my private student loan if it’s in default?

If you have a defaulted private student loan, you’re still responsible for paying it back. Some lenders may accelerate the payment. This is when the entire loan balance becomes due at once. 

Allowing your loans to stay in default keeps you cycling through the list of consequences we mentioned earlier. 

Will lenders work with borrowers who are in default?

Most lenders won’t work with borrowers who are in default. The most recent research on private student loan default rates found 66% of defaulters reached default more than once. 

Lenders see it as a high risk to work with borrowers who fail to make payments. 

When your debt goes to collections, you have several options: 

• Settle the debt with the collections agency. (Negotiate the amount down.)
• Pay the total amount.
• Refinance your loan.
• Declare bankruptcy.

Even if you’ve defaulted, it might not be too late. 

One lender specializes in defaulted student loans.  Yrefy is one of the rare financial companies that refinance defaulted student loans. It works with borrowers with bad credit and offers fixed interest rates for more manageable repayment. 

Does it ever make sense to default on my private student loan?

In almost every scenario, defaulting on your private student loans does not make sense. It creates long-lasting consequences that can prevent you from achieving your goals. Plus, it’s avoidable for most people. 

Can I get my private student loans out of default?

Yes, you can get your loans out of default. 

A select few private lenders will refinance a defaulted private student loan. Even if you choose not to refinance, you have other options, such as negotiating a settlement with a collections agency or paying the total amount.