Private Student Loans
Performance and Nonperformance
Your private student loans will be considered performing as long as you are making the requested payment in full each month and on time. However, the terms of the contract dictate what that means. Sometimes the loans have an adjustable rate of interest that shifts and your monthly payment increases. This often catches private student loan borrowers by surprise and sends them scrambling for assistance.
Your private student loan can be deemed in default once you miss one single payment. I do not see this happen very often. Typically, the private servicer offers a temporary solution that comes with a high price.
The loan documents also spell out what other actions cause a default in addition to non-payment.
Differences between private student loans and federal student loans include:
- In contrast to the remedies available for federal student loans, private lenders can collect money from you only if the lender files a lawsuit and gets a judgment against you.
- A private student loan can't take your tax refund.
- A private student loan can't take Social Security benefits.
- A private student loan can't start a wage garnishment unless there's been a lawsuit in court and a judgment against you.
Settling Your Loan
Private student loans are a different matter entirely because they aren't covered by any federal regulations. Debt collectors can negotiate settlements as they see fit.
That can be good and bad, depending on how you look at it. It's good because there's theoretically more room to negotiate, but it's bad because there's no requirement that the lender or collector settle the debt.
In reality, you'll start getting settlement offers within a few months of going into default on a private student loan. Those offers may sound pretty good to begin with, but remember the collector doesn't start to get desperate until you've been in default for a very long time — think in terms of years, not months.
That's why I usually don't recommend my clients settle the loan until the lender files a lawsuit for collection. By that time, the lender's convinced you're not ever going to pay the loan. The backup documentation is old, and the loan itself may have been transferred a number of time as a way for the lender to minimize its losses.
When the student loan lender files a lawsuit, your best bet is to defend the case with a lawyer if you want to get the best settlement offer.
That's because once you have a lawyer, the lender realizes it isn't going to be able to get a quick judgment against you. The process will get drawn out even more, and every day without a settlement is a day of lower profit.
Make the collectors and lenders sweat for as long as possible and you'll probably get a better settlement for your private student loan.