How to deal with private student loans

Unlike federal student loans, borrowers have few good options for dealing with unmanageable private student loan payments. If your private loan has gone into default, here’s what you need to know.

your options for defaulted private loans

You basically have three options for dealing with a private student loan in default: (1) negotiate a settlement or payment plan with the debt collector; (2) wait to be sued and defend yourself in court; (3) try to wipe out the private loans in bankruptcy.

Negotiation

Private student loan borrowers do not have the protection of federal income-based repayment options. You’ll have to work with the debt collector and try to agree on a reasonable settlement or payment plan you can afford.

Defend yourself in court

If the debt collector won’t be reasonable about settlement, another option is to wait to be sued and defend yourself in court. There are a variety of defenses available in a private student loan lawsuit. While the best case scenario would be getting the case thrown out, in most cases pushing back in court will soften the collector’s bargaining position and get you a more reasonable settlement.

Discharge in bankruptcy

It is difficult, but not impossible, to wipe out private student loans in bankruptcy. You should consult with a bankruptcy lawyer experienced in dealing with student loan issues to see if discharge might be a viable option for you.

Your rights when dealing with private loan debt collectors

Knowledge is power and you should educate yourself on your rights when dealing with private student loan debt collectors. The Fair Debt Collection Practices Act forbids collectors from using misleading, abusive, or harassing collection tactics. You can sue a debt collector who breaks the law even if you owe the debt and there are many benefits to holding a debt collector accountable.

Common FDCPA violations in student loan collections include misleading threats about garnishment and lying to you about wiping out your student loans in bankruptcy.

How to defend a private student loan lawsuit

Procedurally, there aren’t any differences between a private student loan lawsuit and any other debt collection lawsuit. The lawsuit begins with the service of a summons and complaint. Even if the summons doesn’t have a court file number, you must still answer it within 20 days. Your answer must respond to all of the allegations in the complaint and should identify your defenses.

The defenses in a collection lawsuit, however, are somewhat different than those typically asserted in, say, a credit card collection lawsuit. Here is a list of some of the more common defenses in a private student loan lawsuit.

statute of limitations

The statute of limitations in a private student loan lawsuit in Minnesota is generally six years from the date you defaulted on the student loan. Be careful, though, because this analysis can be complex. You need to look at the default triggers in your loan agreement and think carefully about when you first went into default. Depending on your agreement, it may not have been when you first missed a payment. Next, you need to figure out whether Minnesota’s six year statute of limitations period is applicable, or whether another state’s shorter statute of limitations period applies. Then you need to calculate the time between your default and the end of the applicable time limit to determine whether the lawsuit was started in time.

If you can show that your lawsuit was beyond the statute of limitations, a Court should throw it out.

illegal interest rate

Watch out, this one is tricky too. Most states limit how high an interest rate can be charged for certain loans. But there is also a federal law, the National Bank Act, that may allow some lenders to avoid state law interest rate caps. To figure out whether the interest rate on your loan is too high involves a complicated analysis of who your lender is, where they are located, and what interest rate law applies. This is even more difficult because many student loans have variable interest rates that change over time.

If you can show that the interest rate charged was illegal, you should be able to reduce the amount owed. In some cases, you may be able to eliminate the student loan debt entirely.

discharge in bankruptcy

If you filed bankruptcy after taking out the student loans, you may be able to show that the loans were wiped out in your bankruptcy. This, too, is a complicated analysis that involves looking at who made your loan, where you went to school, what you went to school for, whether you used the student loan proceeds for anything other than education, and a bunch of other factors.

But if you can show that your loan was not the type that is automatically discharged in your bankruptcy, you might be able to get a court to throw out the lawsuit.

insufficient evidence

Many private student loans are being acquired by debt buyers. Because they didn’t originate the loan, debt buyers may not have sufficient evidence to prove that they own the debt or the amount owed.

Contract formation issues

If you never agreed to the loan and signed the paperwork, the loan contract shouldn’t be binding. We’ve seen several cases where the primary borrower forged a co-signor’s signature, so if you don’t recognize a loan, you should ask some questions before you concede owing it.

Differences between federal and private student loans

Probably the first step in figuring out your options for dealing with student loans is to determine whether your loans are federal loans or private loans. Here are the key features of each:

FEDERAL STUDENT LOANS

Federal student loans are made or guaranteed by the Department of Education. The most common federal student loan types are Stafford, Direct Loan, PLUS, and Perkins loans. Borrowers can use the National Student Loan Data System to figure out what type of federal loans they have.

Federal student loans generally have lower interest rates and the law gives borrowers many more options for dealing with them if the payments become too burdensome. However, there are very few defenses available if the government begins legal action after default.

Federal student loans are difficult, though not impossible, to wipe out in bankruptcy.

PRIVATE STUDENT LOANS

Private student loans are typically made by banks, credit unions, state agencies, or schools themselves. They may have names like “alternative” or “institutional” loans.

Private student loans typically have higher interest rates than federal loans and the borrower’s credit history will often determine the precise terms. And unlike federal loans, borrowers have very few options if they fall behind on payments. On the bright side, borrowers may have more defenses available if a private student loan lender begins legal proceedings.

Although still challenging to discharge in bankruptcy, private student loans may be a little easier to wipe out than federal loans.

How to know if your student loan is in "default"

A federal student loan is in default if you have gone more than 270 days (9 months) without making a required payment. Once a federal loan is in default, a 25% collection fee will be added to the balance and the government may seek to garnish your wages or seize your federal tax refund.

Private student loan default is governed by the loan agreement and may begin after just one missed payment. Private loan contracts also typically provide for default if the borrower: (1) breaks any promise in the loan agreement; (2) files bankruptcy; or (3) makes a false statement in the loan application.

Once a private loan is in default, the loan may be referred to a debt collector or the borrower may get sued by a collection law firm.

Who is National Collegiate Student Loan Trust?

Over the last few years, National Collegiate Student Loan Trust has brought hundreds of debt collection lawsuits against Minnesota citizens. If you've been sued by National Collegiate Student Loan Trust, here's what you need to know.

Who is National Collegiate Student Loan Trust?

NCSLT doesn't lend money. It's merely a series of trusts that contain a pool of hundreds of private student loans. The loans have been packaged together and sold as investment vehicles. If this sounds similar to the way mortgages are handled, it should.

There are several National Collegiate Student Loan Trusts. They are typically named with the year the loan was originated. For example, most of the cases I'm seeing lately involve National Collegiate Student Loan Trust 2007.  I've also seen loans held by National Collegiate Student Loan Trust 2005 and 2006.

How do the student loans get into these trusts?

First, a bank issues a student loan to help someone pay for college. The bank then sells the loan to an entity called National Collegiate Student Loan Funding. This entity is merely a holding company that deposits all of the student loans into the individual trusts. Once the loans are packaged into trusts, bonds are sold to investors. The investors receive money based on the amount of money collected from student loan borrowers.

The trusts themselves don't actually service the loans and collect the payments. They hire someone, called a servicer, to do that for them. In most of the cases I've seen, the servicer is U.S. Bank.

Another interesting element of these trusts is that the loans are partially guaranteed. This means that the investors basically have an insurance policy when student loan borrowers aren't able to make payments. If the borrower defaults, the guarantor steps in and covers the payment.

What should I do if I'm sued by National Collegiate Student Loan Trust?

In my experience, it's difficult to negotiate a reasonable payment plan with National Collegiate Student Loan Trust. They demand that the borrower hand over a bunch of sensitive financial documents, such as tax returns and pay stubs before they'll even consider a settlement offer. And the offers that they make are rarely affordable. To avoid this frustrating experience, I've been advising people to fight back against the lawsuit by answering it and challenging NCSLT's proof in court.

National Collegiate Student Loan Trust can usually prove that they acquired a pool of loans from the originating bank. But, in my experience, they rarely have sufficient proof that they own your loan. There are other ways to challenge the sufficiency of their evidence and, depending on the specific facts involved, you may have other defenses as well. We've been successful getting NCSLT cases thrown out of court and have negotiated very favorable payment plans by pushing back.