When you’re looking at a significant private student loan debt, your options are limits to two – pay or don’t pay.
If you can afford to make the payments, you should do so as quickly as possible. The faster those private student loans are paid in full, the less you’ll wind up paying in interest charges.
But fail to make payments and you’ll find that there’s no help for you. Federal student loan programs such as income base repayment, Pay As You Earn, and rehabilitation simply don’t exist.
In fact, there’s no legal difference between a private student loan and a standard bank loan. The only time a distinction is drawn is when you’re in bankruptcy court, which is when you find out just how difficult it can be for most people to wipe out the obligation in bankruptcy.
When there are no formal repayment options, no bankruptcy relief and no ability to repay the debt … what do you do?
My recommendation (and it may be a controversial one) is to consider letting the default happen.
What Happens When You Default On Your Private Student Loans
Make no mistake – defaulting on your private student loans is serious business.
- You’ll go into collections and your credit score will suffer.
- You’ll receive phone calls and letters.
- The unpaid balance will be reported to the credit bureau each month.
- And the private student loan lender may sue you.
How To Minimize The Effects Of Default
You can stop the phone calls and letters by invoking the provisions of the state and federal debt collection laws. Demand that the collection stop contacting you, and any further collection efforts must stop. Any phone calls or letters from the collector received after this “cease and desist” letter is in their hands is a violation of the law.
If you dispute the debt to the debt collector, under the credit reporting laws that account must be listed as disputed. All further reporting must cease immediately.
But nothing’s perfect – the damage will be done to your credit score, and the student loan lender can still sue.
The Myth And Reality Of Student Loan Lawsuits
A private student loan lender can sue you for only a certain amount of time. Once the statute of limitations expires, the debt is unenforceable and goes away forever.
But let’s say that doesn’t happen, and the private student loan lender sues you within the time period allowed by law.
First, that’s unlikely to happen right away. While you wait for a lawsuit to come, you can save some money to put towards a possible settlement.
Second, remember that the lender is required to prove every aspect of your liability in order to get the right to collect any money from you. That’s right, a lawsuit is not the same as a judgment – and the only way for a private student loan lender to collect through either a wage garnishment or bank account levy is a judgment.
Without a judgment, there’s nothing the private student loan can do against you.
Third, if you defend the private student loan lawsuit then there’s a far better chance you can get the debt settled on good terms. Just as you’re afraid of losing the lawsuit, so is the lender’s lawyer. The lender is concerned that the proof they offer up isn’t good enough, the accounting not exact enough, and the chain of ownership from the original lender to what is undoubtedly a debt buyer not firm enough.
Risk And Reward
There’s always a risk when you default on a private student loan.
You may get sued and lose the case. On the flip side, defend the lawsuit and you’ll be dealing with a lawyer rather than a debt collector. the lawyer’s got a better chance of having authority to settle the case on better terms for you.
You may need to borrow money for a car or a home mortgage during this ordeal. On the flip side, if you can’t afford to pay the private student loan then your credit score is going to plummet anyway. Paying less than the amount due each month won’t help your score.
It’s not an easy choice to make, and it’s definitely something with which you want to discuss with a lawyer (as opposed to a debt settlement company, which typically won’t be in a position to give you legal advice). But for someone with a full understanding of the risks, this may be a winning solution.