What Happens If You Don’t Pay Private Student Loans?

Private student loans, offered by private institutions rather than the federal government, help students cover educational expenses when federal aid, scholarships, and savings are insufficient. Unlike federal student loans, private loans often have variable interest rates and do not offer the same flexible repayment options or borrower protections, with terms and conditions depending on the lender and the borrower’s creditworthiness. Many students require a co-signer to qualify, especially if they lack an established credit history. Understanding the potential ramifications of failing to repay these loans is important for borrowers and co-signers alike.

Impact on Credit

Missing payments on private student loans can significantly damage a borrower’s credit standing. Even a single late payment can negatively affect credit scores, though reporting to credit bureaus often occurs after 30 days of delinquency. Consistent late payments, reaching 60 or 90 days past due, will have a more drastic impact, with these negative marks remaining on a credit report for up to seven years. A loan entering default status, which can happen after 90 to 180 days of missed payments, further compounds the credit damage.

A default can cause a credit score to drop by a substantial number of points, potentially between 50 and 90 points. This severe reduction makes it considerably more difficult to secure future credit, such as mortgages, car loans, or credit cards. Lenders and landlords review credit history, and a defaulted private student loan can hinder approvals for housing or certain employment opportunities. The negative credit impact persists, limiting financial opportunities for years.

Loan Default and Collection Activities

A private student loan enters default after a period of continuous missed payments, ranging from 90 to 180 days. Once a loan is in default, the lender can “accelerate” the debt, meaning the entire outstanding loan balance becomes immediately due. This acceleration can significantly increase the financial pressure on the borrower.

Lenders will initiate collection efforts, beginning with communication regarding late fees and overdue amounts. Private student loan late fees vary by lender and loan program. If direct collection attempts are unsuccessful, the lender may transfer or sell the defaulted debt to a third-party collection agency. These agencies engage in aggressive communication tactics to recover the debt. While collection agencies are bound by laws like the Fair Debt Collection Practices Act (FDCPA), their persistent efforts can be stressful for borrowers.

Legal Action and Judgments

If collection efforts fail to secure payment, private student loan lenders may pursue legal action against the borrower. This involves filing a lawsuit to obtain a judgment. A judgment is a court order that legally establishes the borrower’s debt and the lender’s right to collect it. Unlike federal student loans, private lenders must obtain a court judgment before taking further collection measures.

Once a judgment is secured, the lender can take post-judgment actions to enforce the debt. These actions may include wage garnishment. While federal law limits garnishment for federal loans to 15% of disposable income, private lenders, after obtaining a judgment, may garnish up to 25% of disposable income, depending on state laws. Lenders can also pursue bank account levies. In some cases, a judgment might lead to property liens on real estate or the seizure of personal assets.

Consequences for Co-signers

Private student loans frequently involve a co-signer who agrees to share responsibility for the loan. This arrangement helps borrowers with limited credit history qualify for the loan or obtain more favorable interest rates. However, co-signing carries substantial financial risk.

If the primary borrower fails to make payments, the co-signer becomes equally responsible for the entire debt. Non-payment by the primary borrower will negatively impact the co-signer’s credit score and credit report. The presence of the co-signed loan on their credit report can also affect the co-signer’s ability to obtain new credit in the future. Co-signers are subject to the same collection activities and potential legal actions, including lawsuits, wage garnishment, and bank account levies, if the loan goes into default. Their responsibility for the debt continues until the loan is fully repaid, even if the primary borrower’s financial situation changes.

Bankruptcy and Private Student Loans

Discharging private student loans through bankruptcy is difficult. Unlike many other forms of unsecured debt, student loans are not dischargeable in bankruptcy unless the borrower can demonstrate “undue hardship.” This legal standard is intentionally high and challenging to meet.

To prove undue hardship, a borrower needs to satisfy a three-part test, referred to as the Brunner Test. This test requires demonstrating that the borrower cannot maintain a minimal standard of living if forced to repay the loan, that this financial hardship will persist for a significant portion of the repayment period, and that the borrower has made good-faith efforts to repay the loan. Successfully meeting these criteria requires an “adversary proceeding,” a separate lawsuit within the bankruptcy case. While some specific private loans might be more easily discharged, the general rule remains stringent.