If you are in default (behind on your payments) on a private student loan, the lender will likely come after you for payment. The collection methods and tools available to private student loan lenders are very different from the methods and tools available to federal student loan lenders. It is important for borrowers to know which tools private lenders can and cannot use.
Do You Have a Private Student Loan or a Federal Student Loan?
Students may take out more than one loan, and these may be different types. If a lender or debt collector is trying to collect on a student loan, your first step should be to determine what type of loan is at issue. A new federal agency, the Consumer Financial Protection Bureau (CFPB), is charged with overseeing private student loan activity. Go to the agency’s website at www.consumerfinance.gov/students/repay for tips on researching your loan type.
You Must Be in Default
A private lender cannot start collection activity on your loan unless you are in default. For federal student loans, “default” is defined by federal laws. For private student loans, “default” is defined in your loan contract.
You should have received paperwork when you took out your loan which included all of the terms between you and your lender. If you do not have the loan contract, contact your lender to get a copy. Every loan contract is different, but common triggers for default are:
- you did not make a payment on time
- you filed for bankruptcy, or
- you are insolvent.
Collection Methods If the Lender Does Not Have a Judgment
Unlike federal student loan lenders, private lenders must go to court to get a money judgment against you before using collection tools like garnishment. (Money judgments are explained in more detail below.) Private lenders usually attempt out-of-court collection before going to court. Most private lenders will hire a third-party debt collector to contact you and attempt to collect the debt.
Lenders or debt collectors usually attempt to collect a defaulted student loan by:
- sending collection letters, and
- calling you.
Limits on Debt Collector Tactics
There are limits to how far debt collectors can go in trying to get you to pay up. The Fair Debt Collection Practices Act (FDCPA) prohibits debt collectors from using deceptive, abusive, or harassing tactics to collect debts. The FDCPA places limits on collector communications and, among other things, prohibits false representations, such as claiming that the lender has legal rights that it does not have. For example, a debt collector cannot claim that a private student loan lender can seize disability benefits or tax refunds—those actions are only available in collections on a federal student loan. (To learn more about what the FDCPA prohibits, and your remedies if a collector violates the law, visit our Illegal Debt Collection Practices area.)
Arranging for a Payment Plan
Depending on the terms of your loan contract, you may have to pay the “reasonable” costs of debt collection activities. If that is the case, and you do not dispute your debt, you may want to contact the lender and attempt to establish a payment plan that you can afford.
Unfortunately, many borrowers with private student loans have had difficulty communicating with private student loan lenders about modifying loan terms or establishing payment plans. The CFPB website offers assistance in communicating with your lender at www.consumerfinance.gov/students.
When the Lender Sues You
If a private student loan lender wants to use additional collection tools such as garnishment, the lender must file a lawsuit against you in court and get a money judgment. The lender needs to prove to a judge that:
- the lender holds a promissory note for the loan amount
- you signed the promissory note, and
- you are in default on the note.
If you are served with a complaint that seeks a money judgment against you, consult a lawyer. The rules for these types of lawsuits vary by state and it is important that a lender show all of the required evidence when seeking a money judgment.
(To learn more about lawsuits for the collection of debts, visit our Creditor Lawsuits area.)
Methods of Collecting on a Money Judgment
Once the student loan lender gets a money judgment against you, it can use other types of collection methods. These methods include:
- garnishing your wages
- placing liens on your personal property and real estate, and
- freezing and garnishing your bank accounts.
(To learn more about collection methods, visit our Debt Collection area.)
Each state has rules governing the procedures for post-judgment collection. States also have laws which protect certain types of property from collection – these are called exemptions. To learn more, see Property Exemptions.
If you are struggling to pay student loans, visit our Student Loan Debt center.