What Happens If You Can't Pay Private Student Loans: Key Risks

• Missed payments can severely damage your credit score, affecting future financial opportunities.

• Lenders may take legal action, which could lead to wage garnishment or asset seizure.

• Private lenders can only garnish your wages with a court order or seize tax refunds, unlike federal loans.

• Co-signers are equally responsible for the debt and face the same credit and legal consequences.

• Early communication with your lender can help you explore hardship options and avoid severe penalties.

If you don’t pay private student loans, several consequences unfold over time:

• Initially, you’ll face late fees and your account becomes delinquent after 30 days. Your lender reports missed payments to credit bureaus, causing your credit score to drop.

• Your loan typically enters default after 120-180 days. With private student loan default, the entire loan balance may become due immediately.

• Your lender could then pursue legal action, potentially leading to wage garnishment or asset seizure, but only with a court order. Private lenders can’t take your tax refunds or Social Security benefits, unlike federal loans.

• Co-signers, if any, become equally responsible for the debt, facing the same credit damage and collection efforts.

But before these severe consequences occur, most lenders offer options for borrowers facing financial hardship. These may include temporary forbearance, interest rate reduction programs, or modified repayment plans.

When you’re unable to pay your private student loans, several processes occur behind the scenes:

• Internal Collection Efforts: Initially, the lender’s internal collections department will likely handle your account. They may attempt more frequent contact through calls, emails, or letters.

• Transfer to Specialized Units: If initial efforts are unsuccessful, your account may be moved to specialized recovery units within the lending organization. These units often have more flexibility in offering hardship options.

• Third-Party Collectors: After internal efforts, lenders might engage third-party collection agencies. These agencies may either work on behalf of the lender or purchase the debt outright.

• Debt Sales: Sometimes, lenders may sell severely delinquent loans to debt buyers at a discount. This can happen months or even years after the initial default.

• Legal Review: Lenders typically conduct a cost-benefit analysis before pursuing legal action. They consider factors like the loan balance, your ability to pay, and the statute of limitations.

• Statute of Limitations Considerations: As the student loan statute of limitations for debt collection approaches, lenders may become more aggressive in their collection efforts or more willing to negotiate settlements.

As mentioned earlier, missed payments on private student loans quickly affect your credit. Let’s break down this process in more detail:

After 30 days of non-payment, your lender typically reports the late payment to credit bureaus. This is when the impact on your credit score begins.

Each subsequent missed payment compounds the damage. Your credit score can drop by 50 to 100 points or more, depending on your starting score and credit history.

The effect becomes even more severe once your loan enters default (usually after 120 days). The default status is reported separately and can cause your score to plummet further.

This credit damage has far-reaching consequences:

• Difficulty obtaining new credit

• Higher interest rates on any credit you do qualify for

• Challenges renting apartments or getting certain jobs

• Potential issues with security clearances

Remember, these negative marks can stay on your credit report for up to seven years, affecting your financial options long after you’ve resolved the default.

When you default on private student loans, lenders have several legal options to recover the debt. But private lenders must go through the court system to take serious collection actions.

Here’s what you might face:

• Lawsuits: Your lender may sue you for the unpaid debt. If they win, they’ll receive a judgment against you.

• Wage Garnishment: Lenders may garnish up to 25% of your disposable income with a court order, depending on the laws in your state. But they can’t do this automatically like federal loan servicers can.

• Asset Seizure: The court may allow lenders to seize certain assets or place liens on your property.

• Bank Levy: Lenders might be granted the right to withdraw money directly from your bank account.

Private student loans typically won’t sue you right after you stop paying. Instead, they usually consider legal action a last resort due to its cost and complexity. Often, they’re willing to negotiate alternative arrangements before taking you to court.

Related: Do Student Loans Ever Go Away?

If you have a co-signer on your private student loans, they’re equally impacted when you don’t make payments. Here’s what co-signers face:

• Equal Responsibility: Co-signers are legally as responsible for the debt as you are. When you miss payments, lenders can immediately pursue your co-signer for payment.

• Credit Damage: Late payments and defaults also appear on your co-signer’s credit report. Their credit score will likely drop significantly, mirroring the damage to your own credit.

• Collection Actions: Lenders may target your co-signer for collections, including potential lawsuits, wage garnishment, or asset seizure.

• Strained Relationships: Financial stress can severely strain your relationship with your co-signer, often a parent or close relative.

• Limited Options: Your co-signer’s financial options become limited, just like yours. They may struggle to qualify for loans or credit cards due to the negative impact on their credit.

Note: Some lenders offer co-signer release after a certain number of on-time payments. But once the loan is in default, this option disappears.

Traditional options like hardship programs, forbearance, or refinancing often fall short when you can’t afford your private student loan payments. These temporary solutions don’t stop interest growth and can worsen your debt problem.

In my experience as a student loan lawyer, I’ve found that more drastic measures can provide real relief:

1. Negotiating a settlement: We’ve successfully negotiated student loan debt settlements with private lenders for 35% to 60% of the loan balance. These are often paid as a lump sum or over a few years at 0% interest.

2. Student loan bankruptcy: We’ve used this process to eliminate some or all of our clients’ private student loans.

Yes, these options will impact your credit score initially. You might see a drop of around 100 points. But this damage is temporary — most people see their scores bounce back within 1-2 years.

The long-term benefits often outweigh this temporary setback:

• Significant reduction in debt

• Lower monthly payments or complete debt elimination

• Opportunity to rebuild your financial life

Related: How to Get Rid of Private Student Loans

While this article focuses on private student loans, make sure you understand how they differ from federal student loans. This comparison can help you better understand your options and limitations:

• Repayment Options: Federal loans offer income-driven repayment plans based on your discretionary income. Private loans typically don’t offer income-based repayment or other IDR Plans.

• Loan Forgiveness: Federal loans may be eligible for various student loan forgiveness programs, including Public Service Loan Forgiveness. Private student loan forgiveness is rare.

• Deferment and Forbearance: Federal loans often have more generous deferment options, especially for economic hardship. Private loans may offer forbearance, but terms are usually less favorable.

• Default Consequences: The Department of Education can garnish wages or seize tax refunds for federal student loan debt without a court order. Private lenders and debt collectors need a court judgment for similar actions.

• Consolidation: Federal loans can be consolidated through the federal government. You cannot refinance private loans with the federal government. Private loans can only be refinanced through private lenders.

• Interest Rates: Federal loan rates are set by the government and are often lower. Private loan rates vary by lender and your creditworthiness.

Not paying your private student loan debt can have serious consequences, from credit damage to potential legal action. While student loan servicers have various internal processes for handling past-due accounts, the impact on your personal finances can be significant. If you’re struggling with loan repayment, it’s crucial to understand your options, including refinancing for a lower interest rate or exploring alternative payment plans.

Need personalized guidance for your student loan situation? Book a 1:1 consultation with one of our experienced attorneys. We’ll review your specific case and provide tailored advice to help you navigate your options and protect your financial future. Schedule your consultation today.