Repayment options on private student loans
While the Biden administration continues to focus on providing relief to federal student loan borrowers in financial distress, it’s another story for individuals encountering problems repaying loans from private lenders.
They have options, though not always great ones.
Private student loans are non-federal education loans made by banks and other financial institutions, such as credit unions and online lenders. Lenders set the terms and eligibility for private student loans. The interest rate — generally higher than for federal loans — and fees are usually based on the credit score of the borrower or any co-signer.
Most student loans are owned by the federal government. Still, private student loan debt amounts to about $131 billion, or about 8% of the total outstanding student loan debt.
Many of those 17 million borrowers are experiencing their own financial stress from struggling to make payments during the pandemic. Now with rising inflation, many with private student loans have exhausted their savings and are desperate for some sort of relief.
Generally, the only time borrowers with private student loans are entitled to any relief at all is if they are permanently disabled or dead.
The good news is that most lenders offer a few options for financial relief for borrowers of private student loans who are encountering financial difficulties.
This may sound obvious, but start by contacting your lender and ask about options for financial assistance. At the very least, check the lender’s website.
Many lenders offer short-term forbearances, typically for two to three months, to help borrowers get back on their feet. Interest continues to build during this period and will be added to the loan balance. Some lenders offer a partial forbearance, which requires interest-only payments and keeps the loan balance from growing.
In addition, some lenders will temporarily reduce the interest rate on the loan.
Take advantage of autopay discounts, where monthly payments are automatically transferred from the borrower’s bank account to the lender. As an incentive, lenders will reduce the interest rate on the loan.
Kevin Ladd, a financial aid expert at Scholarships.com, noted that private student loan borrowers still have the options of loan consolidation and refinancing, although rates are higher on fixed-rate or variable-rate loans.
For borrowers with a combination of private and federal loans, Ladd suggests this strategy: Take advantage of the federal loan repayment pause and pay off the private loan first because it carries a higher interest rate.
Check on whether your state has established payment assistance programs for borrowers in certain professions. Illinois, for example, has separate programs for veterans, teachers, nurses and other public employees.
I’ve always said private student loans should be an option of last resort because of their repayment drawbacks. But if you think you’ll be in the market later this year for a private loan, do your research, shop around to get the best terms and, by all means, have a clear understanding of your options if you run into repayment troubles.