Private Student Loan Forgiveness: A Complete Guide
You may have heard about student loan forgiveness in the news recently. How could you have not, it has been one of the hottest topics in education over the last year. With all the media hype surrounding student loan forgiveness, sorting out the facts can be difficult and you may have a lot of questions. Who is eligible for student loan forgiveness? Are private student loans eligible for forgiveness? What if I have private and federal student loans, can both be forgiven?
In this short guide we plan to clarify some of the rumors surrounding private student loan forgiveness. Moreover, we will highlight a few steps you can take to better manage your private student loans.
Today, student loans are a huge problem for the average American. With 7 out of 10 students graduating with student loan debt, and an average loan balance of $37,000, much of America is facing a difficult financial future. With just a simple Google search for “student loan”, you will see plenty of headlines relating to student loan forgiveness. If you found our guide, your first question is probably:
Getting Private Student Debt Forgiven is Unlikely
Private student loan forgiveness is not an option for the vast majority of student loan borrowers. Most of what you hear in the news regarding student loan forgiveness is related to federal student loan forgiveness. In other words, when you hear “student loan forgiveness” in an ad or in the media, it is in reference to the federal programs which allow borrowers to get their federal student loans forgiven. What is a federal student loan? What is a private student loan?
A federal student loan is an educational loan issued by the Department of Education. There are a couple types of federal student loans available, the most popular being the Stafford Loan.
Private student loans are very different than federal student loans. First off, private student loans are issued by private lenders, not the Federal government. There are many private lenders who offer private student loans. Popular private student loan companies include Sallie Mae, Wells Fargo, Discover, College Ave Student Loans, Ascent Student Loans, and many others. Private student loans generally have higher interest rates in comparison to federal student loans. Furthermore, private student loans usually come without many of the borrower protections offered in federal student loans. One of those benefits being student loan forgiveness.
At this time, there are no widely available private student loan forgiveness programs. Depending on your private student loan lender, you may have the ability to lender specific forgiveness programs. That being said, the availability of these programs is different at every private student loan lender.
Many private student loan lenders are willing to offer private student loan forgiveness upon death. As awful as that sounds, death is one of the few ways to get private student loans forgiven. The benefit is usually described as “death discharge”, and this benefit it usually given to protect the family from the loan obligations upon the death of the primary borrower. Without this benefit, a cosigner may be responsible for paying off the student loans upon the primary borrower's death.
Some lenders also may offer to forgive private student loans with permanent disability. Not every lender offers this benefit, but if you can prove permanent disability you may be able to work with you lender to forgive your loans.
Private Student Loan Forgiveness via Bankruptcy?
Thinking about filing for bankruptcy to relieve your student loan debt? Stop right there! You should not use bankruptcy as a tool for private student loan forgiveness. Filing for bankruptcy brings about many harsh financial problems. And mainly, bankruptcy is no longer guaranteed to forgive your private student loan debt.
The truth is, it is pretty difficult to get your student loan debt removed during bankruptcy. You must show to the court that you have been placed in undue hardship. How do you prove that your have been forced into undue hardship?
You must prove to the court that your private student loans place “undue hardship” on your life, meaning that your private student loans are having a big impact on your quality of life. And, your private student loans are restricting you from providing basic needs for yourself and/or your family.
If you can prove undue hardship, then you have a chance of getting your private student loans forgiven in bankruptcy. You should consult with a lawyer before going down this road.
Debt Forgiveness via Default?
Now that you know that private student loan forgiveness is an unlikely option for most borrowers, you may be thinking about other ways to get out of your debt obligations. If you started thinking about default as a potential option, you should take a deep breath. You do not want to go down this path, for a variety of reasons.
Default may seem like a great option. With one swoop you can relieve yourself from your
debts right? Unfortunately, private student loans aren’t like other forms of unsecured debt, like medical and credit card debt. Unsecured debt doesn’t include and collateral. Private student loans differ from other forms of unsecured debt in that defaulting on them opens you up to many potential legal liabilities.
If you default on private student loan debt, your lender has that ability to take action against you for breach of contract. This means, they can sue you for failing to pay back your student loan debt. If you lose the court case, you will be obligated to pay back the debts. The lender may be able to garnish your wages and even put a lien against your property. Defaulting is not private student loan forgiveness.
Defaulting is not a realistic way to get out of private student loan debt. Default can lead to long term major problems for your financial health.
You should look at other options, such as private student loan refinance, before thinking about defaulting on your private student loans.
Student Debt Consolidation Alternative
For most of us, private student loans have high interest rates. On new private student loans, interest rates can range from 3% all the way up to 14%. If you are stuck paying too much in interest on your private student loans there is help. Private student loan refinance allows borrowers to refinance their private student loans to a lower interest rate. Student loan refinance rates can be as low as 1.92% for qualified borrowers. So if you are paying 9% in interest each year, know that you could potentially cut your rate dramatically. A lower interest rate would lower the cost of the loan. Meaning, you would pay less in interest each month. You would save money, and be able to pay off your private student loans early!
Not everyone is qualified for private student loan refinance. To qualify, you must have good credit, good income, and currently be in repayment of your loans. When you refinance your loans, your new lender will pay off your old loans, then issue a new loan to you personally. You will have one new loan with one new interest rate. If you had multiple loans previously, you will also consolidate your student loans in the process of refinancing. Student loan consolidation companies include SoFi, Darien Rowayton Bank, cuStudentLoans, Citizens Bank, and others. At LendEDU, we allow borrowers to get multiple quotes from all the top student loan refinance lenders.
Student loan refinance is not as good as private student loan forgiveness, but is a more realistic option for the vast majority of borrowers.