There is a time limit for private student loan collection and private collectors do not have as many collection tools as the government. Lawsuits are the main collection tools that private student lenders have.
This does not mean that private student loans are better than government loans. In fact, government loans are usually more affordable and have a lot more borrower protections. However, it is true that if you default, the government has a lot more ways to come after you than private lenders do. Regardless of whether the loan is private or government, it is very difficult to discharge in bankruptcy.
The time limits on how long private student lenders can try to collect vary by state, but are usually about six years after default. You should contact an attorney in your state to find out more about time limits (also called statutes of limitations).
Private lenders will often hire collection agencies. You have the same rights as with government loans to fight back against any harassment or abuse.
Any collection fees for private loans should be stated in the loan agreement. The lender should not be allowed to charge collection fees unless there is a provision like Section L in this agreement. There may also be other laws in your state that place restrictions on the amount of collection fees that private creditors can charge.
Default and Delinquency
The default and delinquency system for private loans is much different than for federal student loans. Most important, you do not have the luxury of a nine month period if you miss payments on a private student loan. You should understand that your loans will usually go into default as soon as you miss a payment. The default period will be described in the loan contract. See section K of this private loan contract. In this contract, you are in default if you:
- Fail to make monthly payments when due, or
- Die, or
- Break other promises in the loan Note, or
- Begin a bankruptcy proceeding, or assign assets for the benefit of creditors, or
- Provide any false written statement in applying for any Loan subject to the terms of this Note or at any time during the term of the Loan, or
- Become insolvent, or
- In the lender’s judgment, experience a significant lessening of your ability to repay the Loan, or
- Are in default on any Loan you already have with this lender, or any Loan you might have in the future.
This contract also specifies that failure to receive a monthly statement does not relieve borrowers of their responsibilities and obligations. This is just a sample. You should review your private loan contracts carefully to better understand what rights you have. There may be additional default triggers in your loan agreement. The CFPB issued a consumer advisory in April 2014 warning borrowers of provisions that may lead to default even if the borrower is current on payments. The danger is that a co-signer’s death or bankruptcy will trigger a default for all borrowers on the loan. One way to deal with this ahead of time is to ask your lender about releasing your co-signer from the account.
Getting Out of Default
Getting out of default on private student loans is a much different process than for federal loans. Unlike federal government loans, private student lenders are not required by law to offer “get out of default” programs. Some lenders may have these programs, so it’s a good idea to check with your lender. If they do offer this type of program, make sure to ask what the requirements are and whether the lender will clean up your credit report after you complete the program. The main problem is that most private lenders charge off loans after 120 days of missed payments. (The time period will vary depending on the lender). After the loan is charged off and in default, most private student lenders will not work with you to help you get out of default.