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STOP! Understand Default Penalties Before You Take a Student Loan

Unless you've been fortunate enough to receive a full scholarship or have your costs covered by Federal loans, you'll probably have to consider a private student loan. Nowadays, these can be a common piece of your payment puzzle.

Let's be frank, right up front: we want to help you make your most informed decision when it comes to a private student loan. So please read on to learn the benefits of--as well as some potential drawbacks--of this option.

What, exactly, do we mean by default? By the book, it’s a prolonged delinquency in the repayment of a loan that causes the lender to take serious action.

The Cost Of Defaulting

Failing to pay back any loan will have negative--and possibly long-term--consequences for your financial health. Not paying back your private student loan can result in:

  • being reported to credit bureaus, which will adversely affect your credit history as well as your (and your co-signer's) credit score
  • the loan issuer calling for immediate payment of your entire outstanding balance
  • significant penalty fees from your lender
  • your default being taken to a debt collector
  • the lender involving you and your co-signer in litigation, which will require you to obtain legal representation and could result in the forfeiture of assets or having your wages garnished

Consolation in Consolidation

Those are some pretty heavy consequences, to be sure. But do these possible outcomes mean a private student loan shouldn’t be a consideration? Certainly not. What you must avoid--for any loan--is negligence that leads to default.

There is one big plus when it comes to private student loans: you can consolidate them when you find a lower interest rate, which should have the added benefit of lowering your payment amounts. The negative here: since these are private loans, you'll have to re-apply, regardless of whether it's with your current loan provider or a new one.

Two of the biggest drawbacks when it comes to private student loans: limited repayment options and--except in the most dire of situations--no prospect of loan forgiveness. (To learn about Federal loan forgiveness options, click here.) Some lenders might offer short-term relief by way of forbearance, but this is always temporary and always by their rules.

If you do take on a private student loan, move it to the front of your repayment line. Why? Chances are these loans will carry higher interest rates. Often, such loans have variable interest rates, which can become an unpredictable strain on your budget. If you can, pay a little extra each month--even if that means paying the minimum on your Federal loans. You'll pay your private loan off faster.

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Borrow Responsibly

We encourage students and families to start with savings, grants, scholarships, and Federal student loans to pay for college. Students and families should evaluate all anticipated monthly loan payments, and how much the student expects to earn in the future, before considering a private student loan.

Your credit history will impact what loans you will be considered for now; how you manage repayment will impact your credit score down the line. Research your options thoroughly before you commit to a loan and, once you're tied into one, make sure you make timely payments.

If you need a little help getting started, we recommend our partner lenders:


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