With the student loan debt crisis in the USA spiraling out of control, the government has come up with several programs to alleviate the burden. Programs like Public Service Loan Forgiveness and Student Loan Forgiveness for Nurses and another one for teachers help students manage and offset their debt burden much faster. Unfortunately, there are no such private student loan options.
Private student loans are offered by private organizations ranging from banks, credit companies, stateaffiliated companies, and other lenders. Unlike the fixed terms in federal student loans, which are governed by law, the terms and conditions for a private student loan are determined by the lender.
This aspect makes the whole process of seeking private student loan forgiveness difficult and complicated. However, with the right guidance and research, you can find out if you are eligible for some of the existing loan forgiveness options or use other student loan management options.
If you are stuck with your private student loan debt, here are four ways you can either discharge or pay it in a more manageable manner that prevents you from drowning under the loans.
1. Private Student Loan Modification
Modifying your student loans is the first option to consider when seeking to manage your private student loans. Most lenders have several modification plans, which will help you reduce the monthly payments you are making or the loan interest. The idea behind modifying the loans is to make them affordable to your current budget.
There is a variety of modification plans to choose though some may require some level of eligibility. Popular options include requesting a review of the interest rates, especially if you took the student loan while the prices were high or increasing the loan term, which stretches the payments over extra months but makes them smaller for each month.
You have to contact your lender and ask them directly for loan modification plans for you and then evaluate them depending on their suitability to your situation.
2. Private Student Loan Consolidation and Refinancing
Like all other loans, student loans can be consolidated. Federal student loans are done through the program under the Department of education, which allows one to retain the protection offered by the federal loan repayment options. However, one cannot use the same avenue when it comes to private student loans. The only alternative is to consolidate using a private lender like a bank through refinancing.
Like consolidation, refinancing involves taking out a new loan to repay all your current debts under one plan. It may not be an effective solution if you are struggling with monthly payments, lack of stable income, and have poor credit.
However, if you want to have manageable debt at a lower cost than your previous one and a way to pay off your student debt faster, this is an alternative. When you have good credit scores and a stable income, you will be able to apply for refinancing.
Another refinancing option is where you get to pay higher payments and still enjoy a lower interest rate. This option allows you to pay back the student loans much faster than the usual student loan term. While refinancing is also an option for federal student loans, if you choose to use this option, you would lose your qualifications for the federal student loan forgiveness programs.
The following three factors determine whether private student loans consolidation.
- You have a steady income. A steady income means having a full-time job or reliable income stream so the lender can expect a weekly or monthly paycheck. A constant source of income increases the chances of you getting a refinancing deal.
- Your debt-to-income ratio. Your DTI is a mathematical equation looking at how much debt you can handle once your recurring expenses have been deducted. It is obtained by dividing the amount of expenditures by the monthly income. The ideal ratio for refinancing is 35 % though most lenders can extend up to 45 %.
- Your credit score. The preferred rating is 690, and above, though, you can still get a consolidation loan with a rating as low as 660.
Consolidating your private student loans offers the following advantages:
- You get a lower interest rate, which could either be variable or fixed.
- You have a lower monthly payment amount.
- You simplify your monthly payments servicing only one loan instead of several, which also lowers the overall cost.
- If you have a good credit score and a stable income, you do not need a co-signer.
When picking your consolidating options consider the following aspects
- What are the maximum and minimum limits? Each private lender its limits with the lowest amount you can borrow, ranging from $5,000 to $10,000 and the highest amount from $40,000 to $300,000. Some other lenders do not have maximum limits.
- Are you going for a variable or fixed interest rates? Fixed interest rates are set for the term of the loan, while variable rates change in reaction to market conditions.
- Are there any discounts provided?
- What are the fees or penalties associated with the loan?
3. Apply for Loan Forbearance or Deferment
Finally, private students can choose to apply for either loan forbearance or deferment. These two options allow you to reduce or put off the monthly payments for the loan when in distress or not in a position to meet them. The only difference is that forbearance will always accrue interest for the period you have not been making the payments while deferment may or may not accumulate interest. Another difference between the two is the duration of the suspension of payments.
Forbearance lets you suspend the payments no more than 12 months at a time while deferment allows for more extended periods like 36 months or more. Ideally, whenever you qualify, you should opt for deferment, and then only if you are not eligible for it should you pick forbearance. The 12 months offered in forbearance cannot be consecutive.
Deferment is applied when your circumstances, whether attending school, internship, or residency or being part of the Red Cross or the military, mean you will not be able to meet monthly payments. Forbearance can be mandatory or discretionary, and just about everyone qualifies for it as long as you do not exhaust the time limits.
These two relief measures allow you to avoid defaulting on your payments, so they should be applied before you default on any debt. Getting into forbearance or deferment does not reflect on your credit rating. To avoid the interest on the sum accruing, you can be making interest-only payments monthly to avoid a higher cost later.
4. Apply for bankruptcy to discharge the private student loan
As a last resort, you can file for bankruptcy to attempt to discharge your student loans. However, there are several obstacles to this option. First, no provision in the law allows you to rid the student loan debt through bankruptcy, and secondly, filing for bankruptcy will leave you exposed to the adverse effects, including your credit rate tanking.
The bankruptcy records also stay for years, (chapter 13 lasts for seven years and chapter 7 staying for up to 10 years). It means you will not be able to access any credit for several years.
Still, it is possible to have your private student loans discharged by filing for bankruptcy. A recent famous case is that of Navy Veteran Kevin J. Rosenberg, who in 2018 had his student loans amounting to $220,000 discharged despite being employed, not disabled, and not being a victim of any fraud.
Rosenberg filed for bankruptcy and proved that continuing servicing the debt would place undue hardship on him and his family. To succeed in having your loans discharged by being bankrupt, you have to show and convince the court that paying it back would impose such hardship on you.
Few students as little as 0.1 % of student loan borrowers opt for this alternative, yet those who do as many as 40 % get a partial discharge. It may be a last resort, but it is worth trying when you are drowning under debt with no other option. There are three things you need to prove undue hardship.
- You have to show that you have maximized your earning potential by pursuing employment that allowed you to earn as much as you can by your qualifications. At the same time, you should also demonstrate you have done all you can to minimize your expenses.
- You also have to show that the hardship circumstances are likely to last for the loan’s remaining term. For a discharge, you must demonstrate a degree of future helplessness, not just a present inability to pay off the debt.
- Finally, you have to demonstrate to the court that you made good faith attempts to pay off the loan. These attempts include maintaining regular contact with the lender, trying different payment options, and paying some amount of the loan even if it is below the required sum.
If you manage to prove to the court your undue hardship, then it may grant you full or partial discharge or relieve you from paying the interest accrued and any associated fees. Another resolution could also be to limit the amount of payments you can make now with the idea of paying more in the future should there be a probability of increased income later.
Following the right steps and carefully picking your debt ensures you can pay off your debt quickly and, where possible, earn debt forgiveness. It is always essential to understand your payment options, which is why you will need expert advice like what we offer.
Contact us today and let us evaluate the best strategy for you to take to pay off your private student loans.