Collection Methods Used by Private Student Loan Lenders

If you've defaulted on a private student loan, the lender has various tools available to collect from you. Before you go into default, learn what repayment options are available—you might be able to avoid falling behind in the first place.

If you're in default—behind on your payments—on a private student loan, the lender will likely come after you for the money. 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. Borrowers need to know which tools private lenders can (and can't) use.

Also, before you go into default, learn what repayment options are available. You might be able to avoid falling behind in the first place.

Do You Have a Private Student Loan or a Federal Student Loan?

Students may take out more than one loan, and the various loans might 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 kind of loan is at issue.

For federal student loans, visit the National Student Loan Data System, which is the Department of Education’s central database for student aid. You can get information about what kind of loan you have, as well as loan or grant amounts, outstanding balances, loan status, and disbursements. You can also go to here to find information about your federal student loans and to get contact information for the loan servicer or holder for your loans.

To find out if you have private student loans and to get information about them, check your loan documents.

You Must Be in Default

A private lender can't start collection activities on your loan unless you're 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 don't have the loan contract, contact your lender to get a copy. Every loan contract is different, but common triggers for default are:

  • you didn't make a payment on time
  • you filed for bankruptcy, or
  • you're insolvent.

Collection Methods If the Lender Doesn't 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 try 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

Debt collectors are limited in how far they 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 can't 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.

Arranging for a Payment Plan

Depending on the terms of your loan contract, you might have to pay the reasonable costs of debt collection activities. If that's the case, and you don't dispute your debt, you might 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 Consumer Financial Protection Bureau (CFPB) website offers assistance in communicating with your lender.

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're in default on the note.

Methods of Collecting on a Money Judgment

Once the student loan lender gets a money judgment, it can use various collection methods to get the money from you. These methods include:

Each state has rules governing the procedures for post-judgment collection. States also have laws that protect certain types of property from collection—these are called exemptions.

Repayment Options for Private Student Loans

Before you go into default on your private student loans, look into options for repaying them. Which options you’ll get, if any, depends on the terms of your loan agreement, your lender, and to some extent the law.

Get a Copy of Your Loan Agreement

Before you do anything else, get a copy of your loan agreement. Private loan terms vary widely. If you don't have a copy of your loan agreement, call your servicer and ask for one. Read the contract to determine if it includes repayment options.

Under the terms of the agreement—or based on the lender’s policies or the law—you might be eligible for one or more of the following options.

  • Interest deferment. Most private loan agreements include an in-school interest deferment option. This means you can choose to pay the interest as it accrues while you’re in school or you can put off paying it and capitalize the accrued interest when you enter repayment. (“Capitalizing” the interest means adding it to the outstanding loan amount.)
  • Forbearance options. You might be eligible to enter into a forbearance for three to nine months. With a forbearance, the lender allows you to stop making payments, or to pay a lesser amount, for a specific period of time. Lenders used to grant forbearance more liberally, but the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) issued guidance that forbearances beyond nine months are inappropriate for private student loans.
  • Modifications and workouts. Private lenders have more flexibility than federal student loan servicers to rework your loan. This flexibility is partly because a borrower can refinance at any time with another private lender and partly because private loans aren’t subject to Department of Education regulations restricting what the lender can accept. The FDIC and OCC allow lenders to offer loan modifications, workout plans, and temporary interest rate reductions for private student loans. For example, lenders can permanently modify the principal, interest, or term length on private student loans. Lenders can allow you to make up missing payments over time without permanently modifying the loan. Some lenders will reduce the interest rate, making it easier for you to catch up on payments. Private lenders determine each of these options on a case-by-case basis.

Refinance with Another Lender

If you’re not in default, you might be able to refinance. Private student loans were popular before the 2008 financial crisis. As default rates increased, most financial institutions stopped lending to students. Since 2014, though, private lenders are once again offering private student loans and various refinance options. The terms of these loans vary widely, so it’s best to shop around. If you have good credit and income, you could qualify for a lower interest rate or an extended term. If you’re in default, you’ll need a creditworthy cosigner to refinance.

Cancellation

While you can cancel federal student loans under certain circumstances, private student loan lenders rarely cancel loans. But in the event of death or permanent disability of the student, it can happen. To find out about cancellation options, contact the servicer to determine if it has a death or disability cancellation policy, especially if the borrower qualifies for a death or disability discharge of a federal loan.

Also, it’s rare but possible to discharge (eliminate) student loans in bankruptcy.

Consider Defenses to Repayment

Even if the debt is valid, you might have a claim or defense that prevents the lender from recovering the full amount of the debt. Borrowers have rights under the Truth in Lending Act (TILA) against private lenders that don’t apply to federal loans. The statute of limitations is only one year. So, you have a limited time to sue if you lender violates this law.

What School Did You Attend?

The Consumer Financial Protection Bureau has sued several for-profit schools in the last few years based on Truth in Lending, unfair and deceptive practices, and Fair Debt Collection Practices Act claims relating to private student loans. These schools are:

  • ITT Educational Services, Inc.
  • Corinthian, and
  • Bridgepoint Education, Inc.

If you attended one of these schools and have a private loan, you should have been notified about these actions and the status of your loans. If you haven’t been contacted, you should look into these matters. You shouldn’t refinance any loans from any of these institutions until you know that the debt is valid and enforceable.

Getting Help

To find out more about available repayment options for your private student loans, ask your servicer.

If you're served with a complaint (lawsuit) that seeks a money judgment against you, it's a good idea to consult a lawyer. The rules for these types of lawsuits vary by state, and it's important that a lender show all of the required evidence when seeking a money judgment.

If you need help understanding a private student loan agreement, want assistance negotiating a workout or settlement with a private student loan lender, or are having trouble getting a straight answer from your loan servicer about your available options, consider consulting with a student loan attorney or debt settlement attorney who deals with student loans.

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