Get to Know Private Student Loan Repayment Options, Restrictions
Back in May, Sen. Elizabeth Warren, D-Mass., introduced the Bank on Students Emergency Loan Refinancing Act, a bill that would have allowed borrowers to refinance their private student loans into the federal loan program, under existing federal loan interest rates. These loans would then be eligible for many of the lower payment and forgiveness benefits available to federal loan borrowers.
Despite a companion bill in the House, extensive media coverage and a respectable number of co-sponsors, the bill failed to move to a vote. However, it gave many private loan borrowers struggling with their payments some hope. After all, as those of you with private student loans know, they can be almost impossible to negotiate if you cannot afford your payments.
If you're wondering why private loan lenders are so inflexible, it's because in many cases they have to be. Here's a look at why.
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The Rules for Retail Credit
Private student loans fall under a category called retail credit, and all its associated rules and multiple state and federal regulators. With very few exceptions, lenders of retail credit are not allowed to offer any programs or alternatives to a loan that would substantially alter the terms of the loan.
In general, this has been understood to mean that any relief, whether it be interest-only payments or forbearance, can't be offered for more than six months total, or 12 months in extreme circumstances. While this can be useful if you're unemployed for a few months, it will only prolong the inevitable if you simply have a high debt and a low income.
Ironically, lenders have a lot more freedom once the loan defaults. In the world of private student loans, the loan is considered in default or charged off after it becomes 120 days past due.
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A charged-off loan is deemed severely past due or uncollectable on the books, but that doesn't mean the borrower still doesn't owe the debt. What it does mean is that altering the terms of the loan won't run the lender afoul of its regulators' accounting requirements and the retail credit rules.
Unfortunately, a severely delinquent loan is also an expensive loan to manage, so it may be more cost-effective for a lender to sell charged-off loans to a collection agency at a discount than to spend the time working out an alternative payment plan with a borrower who may or may not fulfill their side of the agreement. So, don't intentionally go past due in the hopes of altering the terms or getting more repayment options on your loan.
Options for Private Loan Borrowers
There are a few things a borrower who is struggling with private loans can do.
First, take a long, hard look at your budget and sort out the wants from the needs. Second, if you have federal loans as well, get that payment down as low as you possibly can via the lower payment options or even deferment. If you can do either of these, put that extra money toward your private loans.
Also, check to see if you can get a lower interest rate and maybe extend your payment term via consolidation. There are quite a few private loan consolidation products out there now.
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If you do default on your private loan, it's worth trying to talk to the lender as soon as possible to attempt to work out an alternative payment plan. If you aren't successful, it's not a bad idea to send as much as you can per month, every month. Unfortunately, a defaulted private loan is ripe for litigation, but that tactic can be very expensive and a collection agency is less likely to take that action on a borrower who is making a good-faith effort to pay.
Finally, if you have a problem with your private student loan, you can file a complaint with the Consumer Financial Protection Bureau.
It's important to understand the terms and conditions of your private loan before signing on the dotted line. The first bill is not the time to figure out that your loan payments are not affordable, especially when the alternatives are so few.
Betsy Mayotte, director of regulatory compliance for American Student Assistance, regularly advises consumers on planning and paying for college. Mayotte, who received a B.S. in business communications from Bentley College, is a frequent contributor to ASA's SALT Blog; responds to public inquiries via the advice resource "Just Ask;" and is frequently quoted in traditional and social media on the topics of student loans and financial aid.
