Private student loans tend to have stricter repayment terms and fewer options for repaying them compared to federal student loans. When you can’t pay your private student loans, the effects can be far-reaching and ongoing. That’s why it’s best to consider the options that might help you lower your private student loan payment – ideally to an amount you can afford.
What If You Can’t Pay Your Private Student Loans?
If you’ve come to a point where you think there’s even a possibility you can’t make your student loan payment, you should contact the lender. Some private lenders offer assistance programs, although there is no guarantee. Even if the lender doesn’t have a specific assistance program, you may be able to work something out before you’re considered to be in default. The worst thing you can do is not make payments and ignore the problem.
Auto Debit Rate Reduction
Automatic payment discounts are one of the most popular ways borrowers receive discounts on their student loan payments. The U.S. Department of Education offers a 0.25 percent interest rate reduction to federal student loan borrowers who sign up for auto-debit, and some private programs offer similar programs. If you set up automatic payments, you may be eligible for anywhere from a 0.25 percent interest rate reduction to a 0.50 percent interest rate reduction, depending on the private lender’s policy.
Student loan forbearance refers to a scenario where someone’s student loan payments are temporarily suspended. A private student loan lender will typically offer short-term forbearance for borrowers facing unemployment or financial hardship. For example, they may offer two-month forbearance and no more than 12 months in total. Interest does continue to accumulate during forbearance, and it’s added to the loan balance.
A deferment allows borrowers to stop making payments temporarily. However, with a deferment, you might not be responsible for paying the interest that accrues on your loan during this period.
Situations that could allow for private loan deferment include enrollment in school, unemployment, military deployment, or economic hardship.
Interest-only student loan repayment means that for a set period you aren’t making payments toward the principal. Instead, you’re paying only the interest, so you have lower monthly payments. There are partial interest repayment plans as well, and these are ways to help keep balances from getting too high.
Lower Your Private Student Loan Payments by Refinancing
Refinancing is a process in which you replace your current student loan or loans with a new loan that has a lower interest rate.
When you lower your interest rate, you’re also likely lowering your private student loan payments – especially if you get a longer repayment term. If you opt for refinancing, a new private lender pays off your current loans and gives you a new loan with a different repayment timeline.
To refinance, lenders typically want to see a credit score that’s at least in the mid-600s, and they want to see regular income, preferably in a career with job stability. If you don’t meet the standards for refinancing, you may have to work on building your credit score. You might also consider asking a consigner to apply with you, but that cosigner must have good credit and solid income to qualify.
What to Do If You Really Can’t Pay Your Student Loans
Once someone has explored other options, and they feel they really aren’t going to be able to make their student loan payments or refinance, they might wonder if there are other options.
Settling Private Student Loan Debt
Settling private student loan debt implies you have gone into default, and a private loan lender is going through different routes for repayment. A private lender can send you to collections, and then to do anything further, they will have to go through the courts to get a judgment against you. If a lender files a lawsuit against you, they can then take other steps such as garnishing your wages or freezing your bank accounts, if a judge approves it.
When you’re at this point, you can pay the full amount, negotiate a payment plan or settle your debt. If you want to try settling, you’re likely going to have to pay at least 50 percent of what you owe, and it will hurt your credit as well. It’s better to try and work with a lender to create a repayment plan before you get to a point where you need to settle your debt.
Getting Your Student Loans Discharged in Bankruptcy
The most challenging and unlikely option is to get your private student loans discharged by filing bankruptcy. It’s not impossible, but there are very specific rules that you have to meet. Private and federal student loans are exempt from discharge unless the borrower can prove undue hardship stemming from repayment.
Even if a borrower files for bankruptcy, they usually don’t receive a discharge of student loans.
The majority of cases where bankruptcy is a means to discharge private student loan debt involves instances of severe injury or illness that prevent the borrower from being able to work and make money to repay the loans.
If you think there’s even a chance you won’t make a payment on time, contact the lender right away and see what your options are. If you wait and ignore the problem, not only do the interest and penalties grow, but the potential recourse the lender can take grows in severity, too.
Author: Jeff Gitlen
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