We want to help you make more informed decisions. Certain links on this page – clearly marked – may direct you to a partner website and earn us a referral commission. For more information, see How we make money.
Most federal student loan borrowers received a helping hand from the government during the pandemic. Thanks to legislation passed last year and an executive order from President Biden, people with federal student loans can stop repaying them until October 1, with no interest accrued on the balance.
But that doesn’t help Benny Kuo.
Kuo, product marketing manager in Oregon, is one of some nine million student borrowers ineligible for the penalty-free forbearance period granted to most federal student loan holders. This is because these loans come from private entities and not from the federal government.
“I was a little frustrated with the way the government took action for federal student loan borrowers, but not for the private sector. I didn’t quite understand why, ”says Kuo. “I felt left out. All these different constituents of the community benefited from a break during this period, unlike the private borrowers of student loans.
When Kuo graduated from an MBA in 2017, he had nearly $ 50,000 in student loan debt. In an effort to lower its interest rate, Kuo refinanced its federal student loans to private student loans in August 2018 through a local credit union. The interest rate on its loans went from 6.8% to 3.27%, with a 5-year repayment plan.
“I had a good, stable enough job and felt secure that I could lose all the benefits of federal student loans for a lower interest rate,” says Kuo.
Kuo, who is now 29, was able to maintain a stable income during the pandemic and plans to pay off his student loans by September of this year, but he acknowledges that this is rare.
“I feel very fortunate to be still employed throughout the pandemic. I understand that I am one of the lucky ones, ”he says.
Data from the Student Borrower Protection Center, a nonprofit organization, shows that high-income students are more likely to get student loans from private lenders and are generally able to repay them over time. While students from low-income backgrounds and students of color are less likely to borrow, those who take out private student loans often struggle to repay, according to the report.
How private student loan borrowers were left behind
Not all student loans are created equal. Private student loan borrowers do not have access to the same protections as federal student loan borrowers, from reduced or suspended payments to repayment assistance opportunities.
“I see it as the government saying that the people who went through the federal program did the right things and took a break, but the private student loan borrowers who may have been unlucky aren’t getting it,” sums up Kuo.
The pandemic has made this reality clearer, and the student loan provision of the CARES Act is the most obvious example. After several extensions, federal borrowers are not required to make a single payment for their student debt until October 2021. Meanwhile, private student loan borrowers have had few options to turn to for relief and have remained largely at the mercy of their creditors.
“A lot of them have offered some kind of relief, but none of them have been very generous. Most private student loan companies maybe offered a three or six month forbearance or allowed you to skip two months of payment without interest, ”explains Robert farrington, CEO of The College Investor, a site offering advice to student borrowers. “But none of that compared to what we’ve seen with federal student loans.”
Even before the pandemic, private student loan borrowers had fewer options for getting help. Private borrowers hold about 8% of overall student loan debt, but account for nearly 30% of complaints received by the Consumer Financial Protection Bureau, according to 2020 data.
The private student loan market, with $ 130 billion outstanding, continues to grow but remains largely unregulated, so terms and conditions for private student loans can vary widely from lender to lender. Much like auto loans and credit cards, private student loan lenders can set their own repayment terms and eligibility criteria. This could confuse borrowers, causing them to pay more if they don’t understand exactly what they are getting themselves into.
And when it comes to repayment assistance, the industry is also free to set its own terms.
“There is no general policy. You could put five different student loan borrowers and they would all say they got five different ways of relief if they got anything, ”says Farrington. “The best way to describe it is a lot of confusion.”
What private student loan borrowers can do
Even though the federal government does not help those with private student loans, borrowers still have options. If you have private student loans, here are some tips to help you pay off your loans and get debt free.
Start a dialogue with your lender
Experts say the most important thing right now is to get in touch with your lender, if not to discuss your repayment options, at least to stay on good terms if you miss a payment. The worst thing you can do is ignore your student loan payments.
“Private student lenders are much more aggressive with their collection tactics,” explains Farrington. “Private student loan lenders can sue you, garnish your salary, or even sue your home depending on your condition. If you need help and haven’t contacted your lender, this should be your first call.
Your private lender may be willing to offer you flexible repayment options, so it’s always worth asking if you’re having trouble, Farrington says. If you don’t know how to ask or where to start, you can use these tools and sample letters from the Consumer Financial Protection Bureau as a guide.
There is also adjournment or forbearance, but these options should be your last resort. When you go on hold or forbearance with a private lender, your loan payments are temporarily suspended, but interest continues to accrue.
“If you are unemployed or facing other financial difficulties, deferral and forbearance are much better options than defaulting on your private loans,” says Farrington.
Make a repayment strategy
Getting rid of your student loan debt requires strategic planning. First things first: check your balance and interest rate, then come up with a repayment plan.
To do this, you will need to review your budget. Go article by article and see if there are any expenses that you can reduce and redirect to your loan payments. Any extra money you can free up can directly reduce your balance. Carpenter says the best way to reduce your student loan balance is to make additional payments on top of your minimum amount owed. That’s what Kuo did. He calculated how much interest he was accumulating and paid his principal premium each month.
“One positive element in all of this is that all student loan borrowers have been encouraged to take a close look at their personal circumstances,” says Matt Charpentier, CEO of College Funding Services, a Massachusetts student loan consultancy.
Once you’ve reviewed your budget, consider two of the most popular repayment strategies: the debt snowball and the debt avalanche. If you go for the debt snowball method, you will make minimum payments on all debt except the account with the lowest balance. With the Debt Avalanche method, you’ll first focus on the account with the highest APR or annual percentage rate.
Pay attention to your student loan amortization schedule, which determines how much of the payments goes to interest and how much of the principal balance. If possible, try to allocate more of your payments to your principal balance to pay it off faster.
“If you have a mix of federal and private loans, now is a great time to devote whatever you have in your budget to these private loans and try to eliminate them, or at least reduce them as much as possible, since you you’re not having to make federal loan repayments, ”says Farrington.
Lower your interest rate by refinancing
Refinancing your private loans can be a way to significantly reduce your monthly payments, thanks to the low interest rates these days. If you have high interest private loans, refinancing can reduce your current interest rate by a few percentage points and save you money over time. Unlike federal borrowers, private borrowers do not lose any refinancing protection.
“With the current rates, you want to shop around to possibly refinance,” Carpenter explains.
But refinancing only makes sense if you can tick certain boxes. To get the best loan rates and terms, you’ll need a relatively high credit score, a good credit history, and a salary that can support payments. You’ll also want to make sure that you can save a significant amount on your loan repayments by refinancing, otherwise there’s no point doing it.
While there is no hard and fast rule of what constitutes a good credit score, you will want to be in the 600 and 700 to get an attractive rate.
If you are able to do so, refinancing can be a great option, and it could also give you peace of mind.
Kuo does not regret refinancing his federal loans into private loans, even though the repayment of the former has been suspended.
“I felt comfortable taking the risk of knowing I had a better interest rate and saving a lot of time on my student loans,” he says. “It’s much better for my financial goals and my mental health. “