Negotiation is key for defaulted student loan


Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Dear Opening Credits,
I have a defaulted private student loan. Now I'm negotiating with the bank collection department for a new payment plan, but they are asking for a 10 percent down payment. Is that a required payment? What if you don't have the 10 percent? Can I just say I can only afford to start paying the new payment?   -- Cindy


Dear Cindy,
Private loans, as you've discovered, can be tricky to deal with.

Well, I take that back. They are perfectly fine when the loans are in positive standing. You simply start making the payments after the grace period ends, and continue to do so until the very end. You can also choose to pay the accruing interest as you go, so you're not faced with a mega balance when the loan comes due.

Trouble begins, however, when you fail to pay as promised. Private loans can descend into default after missing even the first scheduled payment, as opposed to up to nine months of non-payment for federal student loans. Nor do they come with the same borrower-friendly method for resolution. For example, if you had defaulted on a federal loan, you could cure the default by setting up a reasonable and affordable payment plan, and after about a year, your loans would be rehabilitated. Nothing like that exists for loans issued by private creditors.

Still, try not to make this situation more complicated than it needs to be. The lender just wants one thing. Repayment.

Although the person you've been speaking with has asked for a sizable sum to start the rehabilitation process (and yes, requesting it is allowed), it's still open for negotiation. Ten percent of a debt can be out of reach if what you owe is very high. The average private student loan debt last year was $19,000, according to a Fidelity Investments survey. For a balance so large, 10 percent of that would be $1,900 -- a stretch for most fresh grads.

What is important right now is to develop a repayment plan that will work for you both. While private lenders can't attach income tax refunds or garnish wages without taking you to court and obtaining a judgment first (which can happen with defaulted federal loans), they can sue you for the balance. If they do, chances are high they'll win the case and be granted a garnishment order. At that stage, a portion of your earnings would be sent to the bank. Not only would that mean you'd be forced to live on less, but your employer would be privy to your intimate money problems.

So let's use that that $19,000 example as a guideline for what you may propose. Perhaps you can scrape up $500 as an initial deposit, and can send about $250 thereafter. Presuming your loan has an APR of 11 percent, that would place you on a fairly standard 10-year repayment track. Will they accept such an arrangement? I've yet to see a lender refuse such fair and steady payments. 

Perseverance is key. Forget communicating by phone right now. It's too easy to get flustered. Instead, send a letter outlining what you can and will send as a "down payment" (this is a strange term to use, as a cash deposit usually secures a loan taken out for real property, such as a home or car) as well as your monthly installments. Write a brief summary of how you came up with those figures, including what you earn and the total of your basic expenses.

In the event that they deny your offer, again explain that it is all you can afford and that you want to repay your loan. You may want to send the first payment at this time, as proof of your noble intentions. Once the bank agrees, keep sending the same sum every month and document all activity and conversations.

Maintain close contact with the bank, this time by phone if you wish (but still document everything). They're accustomed to debtors running away from them, so do the opposite. Place regular calls, ensuring that the payments are posted and that your balance is declining as it ought to. Eventually you'll be back on track and out of debt.

See related: Student loan payments choking new gradRestoring credit score after deafulating on student loan

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Published: October 29, 2014

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Updated: 10-25-2016

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