Private Student Loan Debt Relief & Forgiveness: What to Know

Posted on January 7, 2022 in Debt

It seems like student debt can stay with you forever. It’s easy enough to acquire the loans you need to further your education. However, it’s not as simple to get rid of the debt. For most of us, student debt follows us into adulthood, and it can be years before we’re able to get rid of it. Learn what your options are when it comes to private student loan debt relief.

When it comes to student debt relief, it can be easier to find relief for federal student loan debt than relief from private student loan debt. Private student loans from credit unions, banks, and online lenders work differently than federal student loans. Unlike federal student loans, they have fewer protections. So, when it comes to private student loan debt relief, what are your options?

How Are Private Student Loans Different From Federal Student Loans?

Private student loans are not like federal student loans. With private student loans, there are fewer protections than federal loans. Private student loans usually have higher interest rates than federal loans and fewer repayment options. Lending decisions are often based on creditworthiness, and you may need a cosigner.

How to Save Money on Your Existing Private Student Loans

While your options are more limited with private school loan relief, there are ways to get a lower rate or monthly payment. Here are some strategies that can help you save money immediately and/or in the long term.

Re-Negotiate Your Payment Plan

Contacting your lender is usually the best way to see what private student loan repayment options are available for you.

There are usually four ways to repay your private student loan debt: immediate repayment, interest-only repayment, partial interest repayment, and full deferment. You may be able to re-negotiate your current terms to make them better fit your current financial situation. Contact your lender to see if re-negotiating your current plan is an option.

Private Student Loan Refinance Options

Your financial situation may have improved since you first got your loan, or the rate when you applied for the loan could be higher than the rate you’re eligible for now. Either way, it may be a good idea to consider a private student loan refinancing as a way to help with debt relief. You can refinance with your current lender or shop around for a new one. You can also requalify to extend your loan repayment term length. That will lower your monthly payments, but you could end up paying more in total interest over the life of your loan since it’s for a longer period.

If you have more than one student loan, you could also refinance to make them all into one loan. That not only makes it easier to keep up with all your payments, but it could also lower your singular payment based on the interest rate.

Keep in mind that if you refinance your federal loans with your private student loans to make them one payment, you could lose some of the key protections you had with the federal loan.

Loan Repayment Programs

Some states offer programs that help you make loan repayments if you work in a certain profession. For instance,

  • In California and Florida, certain health providers, like physicians, dentists, and nurse practitioners, etc., may qualify for loan assistance if they work in a federally designated health professional shortage area.
  • In Texas, loan assistance is available to people in the legal profession working for a civil legal aid organization.

Loan repayment programs are designed to help individuals in certain professions, meaning you would need to fit the eligibility requirements. Check with your state to determine what the requirements are to see if you qualify for loan repayment.

Forbearance or Deferment

A forbearance or deferment are two options that allow you to temporarily put a hold on your student loan payments. A deferment can temporarily pause your payments if you’re going back to school or entering the military. Forbearances are offered to borrowers struggling to make payments due to certain circumstances like job loss, illness, or financial hardship.

These are not long-term solutions, and unlike federal student loan deferments, interest still accrues during your period of nonpayment. The accrued interest could add hundreds or thousands of dollars to your loan balance. Forbearance or deferment may or may not be an option with your private student loan. Some lenders even have special emergency forbearances in place if the pandemic is impacting your ability to pay your bill. Check with your lender to see if forbearance is an option for you.

Debt Settlement

Private student loan settlements are difficult to get but may be possible in rare cases. If they do allow a settlement, it will require a large lump sum. There are no specific laws or regulations requiring private lenders to offer settlements. The policies and programs vary by lender.

Most lenders won’t even entertain the discussion of debt settlement unless the loan is already in default or written off, which means everything would be done through a collection agency working on behalf of the lender. You will need to check with your lender to determine if debt settlement is an option.

As with most debt settlements, there is the consequence of unpaid debt being labeled as taxable income by the IRS. When this is the case, the IRS will bill you for the forgiven debt. Should you have the opportunity to settle your private student loan debt, know that there may be tax consequences.

Canceling of Debt

It’s not easy to have a private loan debt canceled. Private student loan forgiveness or debt cancellations are not required by law, and private loan borrowers do not have the same range of cancellation options as federal student loans. Some private lenders offer a cancellation program for some loan products but not others. Some will offer to cancel only a portion of a loan in certain circumstances.

How Bankruptcy Affects Your Private Student Loan

Filing bankruptcy may help to relieve some of your debt, but this should only be done as a last resort. Bankruptcy can negatively impact your credit score for up to ten years. In most cases, student loans may be excluded from the debt you file. So, there is no guarantee that your private student loan debt will be accepted as part of the bankruptcy package.

The bankruptcy process can also be expensive. You will have to pay a lawyer and pay court fees. The total cost can add up to hundreds or thousands of dollars.

How Long Private Student Loans Stay on Your Credit Report

There is some debt on your credit report that will disappear after seven years. Unfortunately, private student loans are not one of them. Private student debt will never go away. Only federal student loans are eligible for student loan forgiveness programs, like Public Service Loan Forgiveness or income-driven repayment forgiveness.

That said, a student loan will only negatively impact your credit report if you pay late or default on your loan. There are several ways your student loan affects your credit score:

  • Paying on Time: Even if you can only afford to make minimum payments on your private student loan, it can improve your payment history and boost your credit score. 
  • Paying Late: Payment history is important to your credit score, and missing a private student loan payment is a big deal. A 30-day delinquency could cause your credit score to drop 90 to 110 points.
  • Diversity of Credit: A private student loan, along with other types of credit, like credit cards and car loans, affects 10% of your credit score. Having student loans helps diversify your credit mix, and that can give your credit score a boost.
  • Length of Credit: Having a longer credit history positively impacts your credit score; it affects 15% of your score. So the fact that the private student loan stays with you can be a positive thing for your credit score. Most student loans are 10 years or longer. When you add that to the fact that you’re paying on time, it will really help your credit.
  • Defaulting on your loans: Defaulting on any loan can seriously hurt your credit score. That also applies to student loans. With federal student loans, you enter into default if you miss your payments for 270 days or more. With private student loans, you’re in default if you miss your payments for 90 days. When this is reported to the credit bureau, it can impact your ability to qualify for other types of credit or a mortgage or car loan.

Talk To Your Lender About Your Options

If you find it hard to keep up with your student debt loan payments, always talk to your lender to see what their options are. Your lender may offer flexible repayment options such as an income driven repayment plan, or other strategy beyond what’s mentioned in this post. Your lender may be willing to work with you to find a solution that will benefit you both, especially if you’ve maintained good credit.

Although private lenders are not required by law to help you, some may offer disability and death discharges. Some lenders will automatically allow a private loan discharge if the borrower obtained a federal discharge for being permanently disabled. At the end of the day, know that there are choices when it comes to how you approach private student loan debt relief, and it’s important to make a decision based on your own personal finance situation.

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