My Private Student Loan Added a Huge Financial Penalty to My Balance. – Janette

“Dear Steve,

I borrowed $50,000 for law school and was defaulted after paying late a couple of times while traveling for work. I lost my job soon after and was unable to pay for a period of time. The debt ballooned to $63,000, at which time I was assessed a 25% penalty for non-payment. I have never heard anyone else say that this happened to them, and I can never get an answer when I ask the servicer. It is a private loan under ECMC (Educational Credit Management Corporation), but they said “federal law” allowed them to do this.

Is there anyway for me to try to get this penalty dropped? It seemed crazy at the time, and it seems crazier now, but I assure you it’s true. I have refused to sign any new debt contracts or loans because of this, and the servicer and I are locked in a stalemate. They have garnished my wages twice. So far, their side is winning.


Dear Janette,

Well I agree it is less common to hear about these days but some of the older loans allowed for up to a 40% penalty if the loan defaulted.

Unfortunately all the power with private student loans rests with the lender and servicer. If it was a government loan we’d have some options.

I think the best course of action is to come up with a lump-sum payment and negotiate a reduction or elimination of the penalty in exchange for the big payment. The servicer is not required to charge it but can.

Unfortunately you’ve discovered the dark side of private student loans.

Please post your responses and follow-up messages to me on this in the comments section below.


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Steve Rhode

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