While federal student loans offer several ways to lower payments, private student loans borrowers have fewer options. Unfortunately, this leaves the borrowers who hold the $108.2 billion in outstanding private student loans, per the Q1 2017 Measure One report, at the mercy of their lenders.
Each private lender gets to decide if it will offer student loan forbearance or other assistance. Unfortunately, most private lenders provide only limited or no help adjusting payments.
Borrowers who have private student loans or students considering getting one should learn about these limitations and how they can affect repayment. Here are some of the challenges (and corresponding solutions) for private student loan repayment.
Refinancing private student loans
Your best option for relief from private student loan repayment might be to refinance your private loans. You can refinance private student loans with a variety of banks. In this case, the goal is simple: refinance student loans to interest rates that are lower than what you currently pay, which might also reduce your private student loan payment amounts.
First, however, there’s one important caveat. You’ll need to qualify for student loan refinancing. This is yet another reason why it’s important to improve your credit score, which will influence whether you’re approved.
Private student loan forbearance
If you’re having trouble with repaying your student loans, then your lender might offer you a few forms of limited relief. The best lenders provide the option to defer or forbear private student loan payments.
However, this forbearance is usually only offered in specific circumstances and is subject to the lender’s approval. Plus, private student loan deferments and forbearances are designed to give you a temporary break from payments, not long-term relief. After your forbearance is up, a private lender will expect you to resume paying this debt.
Private student loan forgiveness
If you’re hoping to get rid of private student loans through forgiveness or bankruptcy, don’t hold your breath. Both outcomes are fairly rare.
There are some programs that provide private student loan forgiveness, often dependent on your occupation or employment. These can be worth exploring, especially if you apply for federal student loan forgiveness options.
Bankruptcy discharge for private student debt
Discharging private student loans through bankruptcy is difficult, and in most cases won’t be possible. Still, private student loan discharges are sometimes granted in cases of extreme hardship, or if the borrower used the loans to attend a for-profit school they claim defrauded them.
While this might be good news for some people, the criteria (at least in this example) are fairly complicated and likely require a lawyer’s assistance.
Private student loans with variable rates
Unlike federal student loans, which all have fixed rates that don’t change, private student loans can have variable interest rates that increase (or decrease) over time, based on overall market rates.
When your interest rates go up, you have little recourse with private loans other than to apply to refinance. Keep in mind that you’ll need good credit to get student loan refinancing rates that beat what you’re currently paying.
Target private loan repayment first
If the above techniques don’t work, then your best remaining option might be to simply pay off your private student loans. You’ll need to list your debt and decide which student loans to repay first. Since private student loans have fewer benefits and protections, it can make sense to target those first.
If you decide to do so, simply modify the debt snowball method to prioritize payment of private student loans:
- Pay at least the minimum amount on all student loans, both private and federal.
- Find extra funds in your budget and make a monthly extra payment toward the private student loan that you want to pay off first. This could be the loan with the highest interest rate, lowest balance, or worst forbearance options.
- Continue to do this each month until the private student loan is paid off.
- Once this top-priority private student loan is paid off, continue with the next private loan until it’s paid off as well.
If your private loans are small in value or have lower interest rates, then this strategy might not make clear financial sense right now.
Just keep in mind that you always have more flexibility with federal student loans, should you have to adjust your repayment strategy down the road. So, you might want to take every chance you have to pay off the private loans once and for all.
Despite these potential issues with repayment, a private student loan can still make sense for some students and borrowers. If you’re aware of these drawbacks, you can shop for the best private student loans that provide these protections. Once in repayment, you can proactively manage private student loans to avoid these problems.
Jeffrey Trull contributed to this post.
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