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Defaulting on Private vs. Federal Student Loans

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It’s a simple equation, really. Expensive College + No Jobs = Student Loan Defaults. With sky-high tuition, an anemic economy and a tight job market, America is approaching the $1 trillion mark for outstanding student debt (surpassing even credit cards). That means more and more people are having real trouble paying back their student loans.

The rules governing student loans are not so simple, however. Student loans in general are not dischargeable in bankruptcy proceedings, making them somewhat unique among loans (tax liens, alimony, child support and condo fees are also not dischargeable, among other things). There are exceptions to this rule, which we’ll address further down.

[Article: Student Loan Defaults On the Rise]

But there’s another layer of confusion when it comes to student loans in default: the difference between Federal student loans, which are guaranteed by the government, and private student loans, which can carry higher interest rates and offer fewer borrower protections than their counterpart. Again, neither can be discharged in bankruptcy (except in limited circumstances), and defaulting on either can lead to the garnishment of your wages, but there are some important differences to consider. When you’ve defaulted on a Federal student loan, the government can independently take up to 15% of your paycheck. Wage garnishment because of a private student loan default isn’t as simple, however. The lender must get a court order and the rules governing this type of garnishment vary from state to state. Furthermore, according to one expert with whom we spoke, lenders are somewhat unpredictable when it comes to going after people who have defaulted, as are the judges who ultimately decide these cases.

“When it comes to enforcement, a private loan is no different from credit card debt. Some lenders are suing, some aren’t and they have to win [to collect],” says Joshua R.I. Cohen, an attorney who advises people on student loan repayment options, and purveyor of TheStudentLoanLawyer.com. “There is a statute of limitation based on state law and there are some states where they are not allowed to have a wage garnishment. As long as you can agree to a payment plan, the judge usually won’t issue a wage garnishment, but that depends on the judge.”

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There are also ways to fight and win these lawsuits, says Heather Jarvis, a public interest lawyer and student loan expert (her website is AskHeatherJarvis.com). “Borrowers can raise defenses to these lawsuits and win,” says Jarvis, adding, ”If the lender gets a judgment, they have a specific length of time in which they can enforce the judgment, but most states allow lenders to renew this time repeatedly.”

Jarvis recommends taking a look at the website StudentLoanBorrowerAssistance.org, which among other things, has a helpful article on strategies for defending against student loan default lawsuits, and protecting yourself in the event that you lose the case. Among the strategies they suggest arguing are, “That the creditor miscalculated the amount due. For example, the creditor may be seeking attorney’s fees or collection costs that are too high or possibly not allowed by law… That the creditor is collecting more than you agreed to pay… That the creditor has waited too long to sue you.”

Those who have defaulted on federal student loans have options. The Educational Credit Management Corporation is a non-profit organization that works with students, lenders and the Department of Education to help lower default rates, in addition to creating structured repayment plans for borrowers who have defaulted.

[Featured product: Shop for a student loan on Credit.com]

There are fewer options available to people who have defaulted on their private loans (Cohen notes that in fact, “There’s no difference between delinquency and default for private loans. They can sue you on day one so it’s a matter of semantics.”) Forbearance is one option for people with private student loans. This is when the borrower only has to make interest payments for a period of time approved by the lender. While this strategy may provide some short term relief, it actually increases the amount the borrower will pay back over time, because the principal remains unchanged and interest continues to accrue. For some private loans, forbearance is only available for a limited time over the life of the loans.

Other options for student loan troubles »

Image: fellixis, via Flickr.com

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  • jeremy

    Can private student loans take you income tax from you if you are on ssi/disability and garnish your wages from you social security check each month. I am referring to permant disability and collecting a check from goverment every month

    • Michael Schreiber

      Jeremy — please post this question in forum.credit.com, and we’ll make sure the right experts weigh in…

  • paul

    I have a loan from a bank, but i cant pay anymore, my question is – If i dont own anything why should i even try to pay anymore?

  • David Humphrey

    I was a co-signor for my brother on 2 student loans (CitiBank Student Loan Corp) in 2002, He was making payments, ended up in divorce, unemployed, etc. They were turned over to collection. The one agency, no problem with payment. The other Arrowood Indemnity Corp. turned this over to magistrate. He was making monthly payments for about 2 years, deducted from his checking. They called and wanted more money he offered $25 more making it 125 a month. They would not accept that and quit withdrawing payments. Now there is a hearing which we both have to appear. What happens now?

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  • P. HIPA

    I was hoping your staff might have some helpful tips or information RE: filing a form for Federal loan Discharge.

    I had a long time doctor fill the form out and submit it. he Recommended that the loan be considered for discharge but I think he failed to use “Total and permanent ” language. He is a Dr. not a Lawyer.

    It seems like the agency the form went to just wanted to ignore the Doctor and argue some made up point.

    Where can I obtain another form without having to be harassed by the collections company so I can have a Lawyer or a different doctor certify the private (HIPA) medical reasons that should qualify me for discharge .

    Also, Should I employ an Accountant ( to insure it is done correctly) to prove insolvency to the IRS or other agency at the same time or — to whom and when?

  • Liz

    If I am in Texas, can my private student loan garnish wages against me?

    Thank you so much.

    • Credit.com

      Yes, they can.

      According to the Attorney General of Texas — it states: “Wages may be garnished only to pay debts related to court-ordered child support, back taxes, and defaulted student loans. Debt collectors cannot garnish wages for repayment of consumer debt.”

  • Josh

    I have private student loans through Sallie may I heard recently that Private student loans can be included in bankruptcy since they are muchly considered the same as CC is this true?

    • Credit.com

      Unfortunately, no — this isn’t true at all.

  • Denise Baires

    if you have a private loan in default will your taxes be garnished ?

    • http://www.credit.com/ Credit.com Credit Experts

      First, we’re not tax experts and can’t give you tax advice.

      That said, the TurboTax website has this to say:

      “If you’re expecting a tax refund but have concerns about creditors garnishing it, you may be worrying too much. Federal law allows only state and federal government agencies (not individual or private creditors) to take your refund as payment toward a debt. However, once you deposit the refund into your bank account, these rules no longer apply. Depending on the laws of your state, private creditors may have access to those funds.”

      So the answer is going to depend on state law.

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