What to Do About Private Student Loans if You’re Struggling to Make Your Payments
If you have privately held student loans, you might be feeling a little jealous right now.
After all, those borrowers with federally held student loans received a temporary break on payments thanks to coronavirus relief efforts. This relief is referred to as “forbearance,” and remains in effect 2½ years after the outbreak of the virus.
But there’s no blanket relief package for those holding the $131 billion in private student loans, which accounts for less than 10% of the $1.75 trillion student loan market, as estimated by the Federal Reserve Bank of St. Louis.
However, you do have options if you’re struggling to make your private student loan payments.
By understanding what you have and what you can ask for, you’ll be better prepared to avoid a financial catastrophe.
Federal Loans vs. Private Loans
There is a significant difference between a federal student or parent loan and a private student loan.
As noted in the federal student aid website, federal loans usually come with lower interest rates than private loans (because private lenders are trying to make money off of the loans). Federal loans are also more likely to have fixed interest rates and more liberal repayment options.
There are fewer advantages to taking out a private student loan over a federal loan for undergraduate studies. Financial advisors suggest exhausting federal loan options first. However, if you are looking for funds for graduate studies or you need more than what federal loans offer, a private loan may be the best option.
If a private loan is needed, shop around. Private lenders offer different interest rates, different types of loans (fixed vs. variable), different repayment options and different considerations for forbearance that could pause payments due to financial hardship.
To find out who owns your existing student loans, you’ll likely have to call your servicer to ask about each one — even loans from the same lender.
But gathering that list is a critical first step, since confusion could lead to disaster, said student loan attorney Christie Arkovich, who works with students in Florida.
“Studentaid.gov will list all federal loans,” she said. “If your loan isn’t on that list, then you can be assured you have a private loan.
On private loans, she noted, a student “will receive one notice that says that the (federal) loans have been suspended and put into forbearance, but they keep getting bills on other loans,” she said, adding that if borrowers assume it’s a paperwork issue, they could end up defaulting on a loan.
Two Types of Federal Student Loans
There are two types of federal loans — federally held student loans and federally backed student loans. The difference:
Federally Held Loans
Federally held loans are made by the U.S. government and have terms and conditions set by law. Loans that are owned by the federal government include Direct Loans, subsidized and unsubsidized Stafford loans, Parent and Graduate Plus loans and direct consolidation loans. They qualify for the coronavirus relief bill benefits.
Federally Backed Loans
Then, there are loans backed (or guaranteed) by the federal government, but not owned by them. That group includes the majority of the Perkins loans and Federal Family Education Loans, better known as FFEL loans.
FFEL was a federal program that was mostly administered by state or private agencies. So those loans don’t qualify for the coronavirus relief bill benefits.
And although the program ended in 2010, as of the first quarter of 2020, 11.8 million borrowers still owed $257.2 billion in outstanding FFEL loans.
Many states have also implemented student loan payment waiver programs. Check with your state’s official website and the state’s attorney general website for eligibility.
Because those loans are federally backed, there’s a good chance their servicers will offer the same options that federally held student loan borrowers are receiving.
“With the FFEL loans, the servicers can voluntarily do the same kind of forbearance that the direct loans are going to now receive from the government,” Arkovich said. “But voluntary might vary from servicer to servicer.”
And that leaves us with the commercially held private loan.
These loans — made by banks, credit unions and corporations — aren’t backed by the federal government, so they aren’t required to offer any of the same protections or benefits.
But like a lot of other creditors, student loan lenders offer assistance if you’re struggling to pay your bills. It’s just not automatic.
“There’s no federal law governing whether the loans have to be put on hold, so contact them and let them know what your circumstances are,” said Ryan Law, an accredited financial counselor and author of Student Loan Planning. He added that reaching out before payments are due will give you more leverage when negotiating.
3 Options for Negotiating a Loan Break
You know you are struggling to pay your private student loan, but what should you negotiate for when you talk to the lender? Here are three options.
Forbearance among private lenders is offered on a lender-by-lender, case-by-case basis.
Since private lenders are generally following the federal government’s lead, most have forbearance options, which temporarily postpone payments on student loans for a period of time.
By skipping your monthly student loan payment, you can hold onto the cash for other emergency expenses.
However, while the federal government suspended payments without interest, a private lender’s terms for forbearance may not be as generous.
To avoid any unwelcome surprises at the end of the forbearance, you should ask your loan servicer the following questions:
- How long is the forbearance period?
- Are there any fees associated with accepting a forbearance?
- Will interest continue to accrue during this period? How is it added at the end of the period?
- What will be my new payment at the end of the forbearance?
You must consider that any short-term relief could end up hurting even more if you have a higher payment at the end of the period — and you’re still out of work.
Consider these options when attempting to pay off your student loans quicker and with less total payout.
In addition to the relief package benefits, federally held loans also typically offer lower interest rates compared to commercial loans.
If you’re currently in good standing with your lender and still have your job, you could qualify for much better rates and put a dent in your student loan balance. Or you could shop around for even better rates with a new lender.
“I wouldn’t recommend refinancing federal loans into private loans,” Law said. “We’ve seen the benefits of federal loans over the past few years with no payments and no interest on federal loans.”
If your servicer offers an extended repayment plan, you’d reduce your monthly payments, but you’ll end up spending a lot more time and money to pay off the loan. Avoid this option if possible.
Refinancing is becoming more difficult to qualify for as banks begin to tighten lending. It’s also important to note that refinancing typically comes with fees, which can offset some of the gains from a lower interest rate, which makes refinancing a better long-term financial strategy.
“I only want someone to refinance if they know they can fix the problem,” Arkovich said. “If they’re just temporarily putting it at bay — if it’s not a fix — then they’ll probably just hurt themselves by refinancing.”
And if there’s any concern that you’ll lose your ability to make payments in the near future, switching to a different lender could be a bad choice amid the pandemic. Most relief programs require at least three months of payments to qualify, so you could lose out as a “new” borrower.
3. Rate Reduction
If you still have the ability to make your student loan payments — for now — you could also ask about the lender’s temporary rate reduction program.
In this program, your interest rate is reduced to as low as zero percent for a period of time, typically from six months up to a year.
Rate reductions aren’t limited to coronavirus-related events, but Arkovich noted that lenders don’t typically advertise this option. “In my experience, this was something that wasn’t offered, but you could always ask for it,” she said.
In a rate reduction program, the lender will reduce your monthly payment. But be aware that depending on the payment structure, less may be going toward your principal balance, too. That could mean your total loan cost may be higher by the end of the period.
If a lender offers interest-only payments, resist the temptation. Yes, you’ll fork over less each month, but you’ll be stuck making those payments forever because you’ll never reduce the balance.
But if you have the ability, the program could help you strategize for long-term success by saving on interest.
“Ask for interest rate reduction and then try to pay as much as they can toward the principal during that time,” Arkovich said. “Then when it starts accruing interest again, the balance is that much smaller.”
And if you can use the rate-reduction period to wipe out a loan faster, it could free up some cash if income becomes an issue in the future.
Tiffany Wendeln Connors is an editor at The Penny Hoarder. Kent McDill is a regular contributor.