Managing Student Loans: Managing Private Loans
Most of what is written about dealing with student loans concerns those issued, backed and administered by the federal government or in some cases state agencies. And the regulations and programs that may apply to federal loans are for the most part not available to private loan borrowers.
Federal student loan debt is estimated to top $1 trillion. As of the end of 2011, the total outstanding privately issued student loan debt was estimated at $165 billion. This may be an understatement since there is no central repository for information on private student loans.
Private student loans are an increasingly important market, utilized primarily by students with higher debt needs, like students who have little or no family contribution, students at private universities, and those seeking graduate and professional degrees.
The Department of Education has no role in regulating private student lending. These loans are issued by banks and other financial institutions, and in some cases by non-profit agencies. They set their own terms.
Even though private student loans are not regulated by the Department of Education, private lenders must still adhere to other federal and state laws that apply to lending in general. For instance, the loans cannot exceed the interest rates set under state usury laws. In addition, federal law also requires some special disclosure requirements for private student loans that are designed to ensure that borrowers understand the costs and terms. These disclosures are made at the loan application stage, the approval stage and the loan consummation stage.
These disclosures include information about rates, fees and late payment costs, repayment terms and school eligibility requirements, and the availability of federal student loan alternatives. Borrowers are also required to complete a “self-certification form” explaining that cheaper federal loans may be available to the student.
In preparing to manage your private student loans, it is important to understand what you can expect and what your private lender can offer you. Here are some facts and general guidelines to dealing with private lenders:
When Considering a Private Student Loan . . .
- Interest rates for private student loans tend to be higher than for federally backed loans.
- Some lenders may offer reduced interest rates or extended payments.
- Many private lenders require that you provide a co-signer who will be equally liable on the loan if you cannot or do not make the payments.
- Most private lenders require that you and your co-signer are creditworthy, have a certain credit score, salary or debt-to-income ratio.
- Many private lenders charge application, origination or disbursement fees.
- Some private lenders offer repayment periods of up to 20 years, depending on amount financed.
When You Have Trouble Making Your Private Student Loan Payments . . .
- To change your payment or your payment terms, you must negotiate directly with the lender. Many lenders offer some sort of consolidation feature for private student loans or they will refinance the private student loans.
- Some private lenders offer programs to defer payments during periods of unemployment or illness.
- Private student loans cannot be consolidated with federal student loans in a federal consolidation program like a Direct Loan Consolidation.
- Private student loans are not eligible for federal repayment solutions like IBR, ICR, Extended Repayment or Pay As You Earn.
- Some lenders may offer to consolidate your federal student loans into a private consolidation loan. If you choose this route, your federal student loans will be paid off and federal consolidation will no longer be available to you. Ever.
- Rehabilitation options for defaulted private loans are at the discretion of the lender.
- Private lenders are subject the standards set down in the Federal Debt Collection Practices Act, which governs the relationship between borrowers and third-party collection agencies and the standards required by the Fair Credit Reporting Act. You have rights if the collector engages in unfair practices or harrasses you for payment or if the collector, servicer or loan holder incorrectly reports your payment history to credit bureaus.
Private Student Loans in Bankruptcy . . .
- Private student loans are subject to the same standard for discharge in bankruptcy as are federally backed student loans.
- Some private student loans may be dischargeable in bankruptcy if they were made for more than the amount necessary to cover ordinary expenses of college.
- Private student loans can be managed through Chapter 13 repayment plans.
- Unlike federal student loans, which have no statute of limitations for collection, private student loans are subject to a statute of limitations as determined - usually - by the borrower's state of residency.
For lots more information on managing your student loans during difficult financial times, see our articles on the following issues:
What Kind of Loans Do You Have?
When You Can't Make Your Payments
Managing Private Loans
Student Loans in Bankruptcy