That word carries a lot of weight in the world of student loans. Last year, 1 million federal student loan borrowers defaulted on their loans, which means they failed to make a payment within 270 days of the due date. It’s expected that almost 40 percent of borrowers will default by 2023, according to a report by the Brookings Institution.
Defaulting on your loans can lead to some pretty serious consequences, from poor credit to wage garnishment. So if you feel like your student loan payments are becoming unmanageable, it’s a good idea to work out some sort of solution with your lender before it’s too late.
The only problem? If you have private student loans, you’ll probably have a much harder time than with federal lenders. But mentioning the possibility of default might help get the ball rolling.
Federal vs. Private Student Loan Default
When you default on a student loan that was issued by the federal government, your credit score will take a major hit and the loan will be sent to a collections agency, which can charge a fee as high as 40 percent of the balance. You also could have your wages or tax return garnished.
But the good news for federal student loan borrowers is that there are several programs in place to help prevent this situation. “You have a lot of flexibility,” said Adam Minsky, a Massachusetts-based lawyer whose practice is devoted solely to helping student loan borrowers. For instance, borrowers can pursue payment plans that are tied to their income. “This means if you’re experiencing a financial hardship or a reduction in income, you have built-in ways of lowering payments,” Minsky said.
He also noted that federal loans come with pretty generous deferment and forbearance options, which let you pause payments for a variety of reasons. And if a borrower does default, there’s an option to rehabilitate the loans and get back in good standing.
That’s not the case for private student loans, which are issued by private financial institutions and therefore don’t come with any federal benefits or protections. In fact, these loans might not offer much payment flexibility at all ― it’s up to individual lenders to set their own policies.
“[Private loans] have basically one payment plan, with no real flexibility beyond that, and pretty limited forbearance options,” Minsky said.
And unlike federal loans, private student loans can enter into default in as little as 90 days of nonpayment. Borrowers can actually be sued by their lenders for the balance.
Negotiating A Payment Plan With A Private Lender
So what are your options if you have private student loans but can’t afford the payments?
It’s generally not possible to settle your private loan balance for less than you owe, especially if you’ve been making your payments in full and on time. But because it’s in the lender’s best interest to collect on all the loans it issues, there’s a chance it might work out a deal with you if it believes you will likely default.
“In some cases, some lenders will offer a settlement when the private loan account is severely delinquent and nearing default,” said Minsky. However, this situation isn’t common and the deals aren’t too generous. Plus, if you can’t afford your payments, it’s highly unlikely you’ll be able to come up with the cash to settle.
But that’s not the end of the road. “Some private loan companies will offer very temporary types of options,” Minsky explained, noting that they might offer some sort of interest-only plan or payment reduction.
“It’s usually a very tedious and time-consuming process for borrowers.”- Adam Minsky
For example, SoFi offers student loan borrowers the Unemployment Protection Program. In the event you lose your job, SoFi will let you put your loans in forbearance in three-month increments, with a cap of 12 months over the life of the loan. Sallie Mae also offers forbearance to borrowers experiencing financial hardship as long as they can make a good-faith payment of $50 on each account.
However, in general, “It’s usually a very tedious and time-consuming process for borrowers,” Minsky said. “They usually have to provide an enormous amount of detail in terms of all their finances ― their income, their expenses ― and for their co-signers as well.” Minsky also pointed out that all this detailed information could end up being used against you if the lender decides not work out a plan with you and the loan ends up going to collections.
In the end, negotiating with a private student loan company is tough, time-consuming and might not work out in your favor. But as Minsky points out, “In my experience, lenders are looking for evidence of severe financial hardship.” So if that sounds like you, it’s worth telling your lender that you’re in danger of defaulting. They just might listen.