What Happens when You Default on a Private Student Loan?

The penalties for a default on a private student loan are similar to any loan default penalties. This means you will suffer immediate financial consequences and you will also have to consider the consequences the default will have on your future financial profile. Depending on the type of loan you arranged, the penalties will differ slightly, but there will be some common issues you have to deal with.

Immediate Consequences

  • Seizure of assets - Most student loans are not secured against an asset. However, if you did place collateral in order to secure your loan, your asset will be subject to immediate seizure. While some lenders will notify you before your asset is seized, others will move quickly in order to catch you off guard. If you have placed collateral, it is imperative you respond to contacts from your lenders immediately before the loan moves into default.

  • Legal ramifications - Even if you did not secure the loan, you do not necessarily get out of paying it off. Instead, your lender will take legal action to recover the fees you owe. This may take the form of a lawsuit. In some cases, a judge can even order a lien against your income or the liquidation of your personal assets in order to resolve the debt. The only way to end a legal battle is to declare bankruptcy. You only have this option if you qualify based on your financial situation, and it would be very detrimental to do so at a young age. The loans you seek in the next 5 to 10 years would all be affected by the action. 

  • Penalties and fees - You will have added expense to pay off a loan after it has moved into default. Even if you can come up with the cash to resolve the initial debt, you will owe money for the hassle the lender has gone through. This can make your loan substantially more expensive, again pointing to the importance of resolving the issue before it gets to this point.

Future Consequences

  • Drop in credit score - Your credit score drops the second you are late on a payment. Once your loan goes into default, your score drops even more. Whenever your FICO scores drop, all of your future loans will become more expensive. This is particularly important for students who may be seeking to purchase a car or home shortly after graduation. Especially if your income is initially a little low, it will be hard to get the loans you need to get on your feet in these circumstances. 

  • Default on record - Aside from your credit score dropping, you will have a default on your credit report. Depending on where you live, there will be a statute of limitations regarding how long this can be reflected on your credit report. If you choose to student loan consolidation or student loan refinancing before you default, you will still have a mark against your credit, but it will not be nearly as detrimental. It is better to pursue these options and avoid the default if you truly cannot pay the loan.

 


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