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Private Student Loan Default

Puzzle and Maze

Updated: Sep 18, 2014

Highlights

  • Private student loans can be discharged in bankruptcy under narrow circumstances.
  • Private student loan creditors must use the court system to get a garnishment.
  • Bills.com contains many student loan payment resources.
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Learn What Steps A Lender Can Take if You Stop Paying a Private Student Loan.

Private student loans are the same as other unsecured debt, such as credit card debt or medical debt, in all ways but one. If you default on a private student loan (or other unsecured debt), the creditor has a cause of action against you for breach of contract. In other words, the lender has the right to sue a borrower who fails to make their private student loan payments as agreed.

If the lender prevails in court and wins a judgment, the lender, now called a judgment-creditor in legal-speak, can ask the court to have the borrower’s (now called the defendant or judgment-debtor) wages be garnished, a levy placed on the borrower’s financial accounts, or a lien attached to the borrower’s property.

Check the Dept. of Education’s National Student Loan Data System (NSLDS) to see if the loan is federal. State statutes of limitations do not apply to federal loans, and are subject to collection indefinitely. Student loans not backed by federal grants or guarantees do not appear in the NSLDS, and are therefore private. Private student loans are subject to state statutes of limitations.

The only thing that separates a private student loan from any other unsecured debt is that private student loans are currently not dischargeable in a bankruptcy filing, unless the debt creates an undue hardship on the petitioner. (See the Bills.com resource Student Loan Bankruptcy for more about this subject.)

For more information on collection actions for default on student loans, see the Bills.com resource Collections Advice to learn more about wage garnishment, account levy, and lien law. See the Bills.com resource State Statutes of Limitations for information about each state’s debt laws.

Need a student loan? See the Bills.com resource Student Loans resource page. Problem with a student loan? Learn more about Student Loan Consolidation.

See the following Bills.com resources to learn more about resolving student loan debt and avoiding private student loan default:

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266 Comments

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  • JW
    Jun, 2014
    Jan
    Hello, I took out a private Citi Assist loan through CitiBank in 2008. I have never been able to make payments and this loan has now been turned over to a collection agency ( second collection agency). I have requested a validation letter, which they have responded to. On my letter I checked that I would make payments while I am in school. While I was in school they sent me letter for payment and I deferred payment. Does this deferment reset the statue of limitations on this loan? My credit report shows that they put that payments should have been made after graduating. However I contacted them today and wrote down the representatives id number; she stated that repayment was suppose to start November 7th 2008. I am very confused and trying to see if the statute of limitations can work in my favor.
    0 Votes

  • RM
    May, 2014
    Ray
    Original loan defaulted in 2006. I was contacted in 2009 by a collection agency and I made monthly payments through 2010. Sallie Mae then contacted me and said they had the loan back and to become current I had to pay $8000, which I didn't have. They were extremely rude so all communication was done after that. It is now 2014 and the defaulted/negative status on my credit report is gone. My score jumped up 125 points last month. Did I reset the clock on SOL in MA by agreeing verbally not in writing with the collection agency? Does the SOL just apply to the original creditor(sallie mae)? I have not to date received anything about being used or brought to court. Should I expect that soon? Thanks for the help
    0 Votes

    • BA
      May, 2014
      Bill
      You mentioned Massachusetts. If you are a resident of that state, then it is likely (but not a certainty) Massachusetts statute of limitations rules apply. Read the Bills.com article Massachusetts Collection Laws to learn more about your liabilities and protections under Massachusetts law.

      If your Sallie Mae loan is private, it is likely (but not certain) a Massachusetts court would apply a 6-year statute of limitations. If your last payment to a collection agent or Sallie Mae itself was in 2010, then the statute of limitations expires in 2016.

      Should you expect a lawsuit? Who knows. Creditors are unpredictable.
      0 Votes

  • RW
    Apr, 2014
    Ryan
    I have a private student loan with a balance of 12,000 I don't have any detailed information on this loan it was sent for AES to NCO financial I cannot remember for sure if it was delinquent or defaulted at that point I made a lump sum payment of $1,500 and set up monthly payment plans from there I fell about 60 days behind on payments and never had any contact from NCO and the account was sold to MRI associates from what im being told as I was contacted from MRI im not sure how to pursue the best course of action to resolve the matter and would greatly appreciate some advice because its hard to trust what the collection department tells you and I have no other resource to validate what they tell me
    0 Votes

    • BA
      May, 2014
      Bill
      Take these five steps:
      1. Validate the debt. A debt that cannot be validated cannot be collected. Roughly half of all collection accounts cannot be validated.
      2. Check the Dept. of Education’s National Student Loan Data System (NSLDS) to see if the loan is federal. State statutes of limitations do not apply to federal loans, and are subject to collection indefinitely.
      3. If the loan or loans are private, learn your state's statute of limitations. If the loan or loans are private and the clock for your state's statute of limitations for written contracts expired, then send the collection agent a cease communications notice.
      4. If the collection agent validates the debt, and the statute of limitations clock has not expired, then negotiate a settlement to the debt. A settlement can be for less than the amount the collection agent claims you owe.
      5. If you receive a notice of a lawsuit, consult with a lawyer to file an answer. Ignoring a lawsuit will not make it go away and will almost certainly make your situation worse.

      Under the Fair Debt Collection Practices Act, a collection agent may not add fees or interest to a collection account such as a private student loan, unless the fees or interest are mentioned in the contract the consumer signed with the original creditor. Because most collection agents cannot produce a copy of the original contract the consumer signed, courts usually do not allow collection agents to add fees to their collection accounts. In other words, just because a collection agent adds mystery fees to your account doesn't mean you're legally obligated to pay them.

      0 Votes

  • GS
    Apr, 2014
    Genevieve
    I had three FFELP loans taken out in 1999, 2000 and 2001, which were issued to me through Banc First in Shawnee, Oklahoma and then sold in 2002 to Sallie Mae Servicing. I made payments on it but there were discrepancies on the amounts owed and eventually I stopped paying as I couldn't get anywhere. Recently, I received a call from NCO Financial Systems regarding these loans, they've been discharged to NCO, but the information they emailed me regarding these loans is vague; no dates, no information on school, etc. The numbers are also completely wrong.

    Are my loans now considered federal or private? Does the statute of limitation on debt apply here? I was a permanent resident at the time but have not been in the USA since 2001 and no longer have permanent residence (left because husband was abusive), does this help me at all? Also the forms I have here from the original loan have my status as OK resident, when I was an international student at the time (no residency yet). What are my rights? NCO is harassing me!
    0 Votes

    • BA
      Apr, 2014
      Bill
      FFELP is an acronym for Federal Family Education Loan Program, so it would be safe to assume that if your three loans are FFEL, they are federal. To be certain, login to the National Student Loan Data System (NSLDS) to learn if your loans appear in this database. If they do appear, then your loans are federal.

      If your student loans are federal, see the Bills.com article Steps to Recover from a Federal Student Loan Default to learn what actions you need to take.

      The US Dept. of Education hires collection agents, such as NCO, to contact delienquent borrowers in attempts to set up payment plans. The Dept. of Education does not sell the rights to federal loans, in the same manner that banks sell collection accounts for delinquent credit cards and vehicle loans.

      It is unclear to me if you reside in the US. If you do, then you are subject to federal law and the state laws where you reside. If you are not a US resident, then you are not subject to US or state law, but instead the laws of the country where you reside.

      If you are not a US resident, it is possible for NCO Financial to attempt to pursue you in your country of residence. Doing so, however, is expensive. If your loan balances are relatively small, it is unlikely NCO will attempt to file a breach of contract lawsuit in your present country of residence. I hasten to add if you receive a notice of a lawsuit, consult with a lawyer or solicitor immediately.
      1 Votes

  • MR
    Apr, 2014
    Michael
    Hello, I took out student loan in 2006 and been in deferment ever since. Taking class to defer my private student loan. I got a notice today that S. Mae said that my loan is no longer able to be deferred. I was wondering can they file suit against me? Other words everyone is saying SOL but does that state also applies to 8 years of deferment?
    0 Votes

    • BA
      Apr, 2014
      Bill
      A deferment resets the statute of limitations clock. Let me illustrate this with made-up facts:

      Let's say for the sake of argument you took out a loan where the payments were supposed to start on May 1, 2010, but you and Sallie Mae agree to a deferment until July 1, 2014. The statute of limitations clock starts July 1, 2014, and not back in 2010.

      You mentioned you are taking a class with the intention of deferring your loan. Review your loan contract and the deferment contract to learn if you can extend the deferral period by taking a class.
      0 Votes