Managing Private Student Loans

Getting a private student loan is a big decision and it is important to know what to expect once the loan is disbursed. Unlike federal student loans, private loans have less consumer repayment options and protections.

How do I know if I have a private student loan? 

There is no data base you can access to determine if you have a private student loan.  But here are some indicators that your loan is private:

  • The interest rate is high.  The average interest is about 11.5 percent for private student loans. Federal loans have 7+ percent interest at the high end.
  • You had a co-signer. Private loans will usually require a co-signer.
  • Your loan does not appear on the Federal Student Aid Dashboard. Only federal loans are on this system. If the loan at issue is not here, it is probably a private loan.

What are my repayment options for private student loans? 

  • Your repayment options are set by your lender and included in your loan documents, known as promissory notes.
  • Your monthly payment will usually be based on a set repayment term–5, 10, 15, 20, or more years. You may have different repayment options, including deferment, while the student borrower is in school.
  • Private loans do not have the various repayment and loans discharge options available for federal loans.

Can I reduce my monthly private loan payment? 

  • It will depend on your lender.  Lenders may have different programs that allow borrowers to pay less than their scheduled amount.
  • Private lenders are generally not required to offer deferment or forbearance options.

Caution: Keep accurate records and continue to check your private loan statements. Borrowers who get a reduced repayment option due to an economic or other hardship report having other issues, like having to submit proof of income on a regular basis or seeing their monthly payment go up unexpectedly.

Should I refinance a private student loan?

  • Lowering the interest rate on your loans (if you are eligible to do so) can result in reduced monthly payments.  This can be beneficial to some borrowers.  But…
    • Refinancing will usually extend the repayment terms and you might pay more over the life of the new loan.
    • Consider the administrative costs of getting a new loan.
    • Get help to make sure the benefits are substantial enough to make refinancing a worthwhile option.

Caution: Getting a private loan to pay off federal student loans is rarely a good decision. You will lose the benefits and protections that come with federal student loans. Get advice before taking any action.

Can I discharge my private student loans in bankruptcy?

It is possible but difficult. Get legal advice if you are considering this option. Based on recent court cases, a person must show “undue hardship”, which generally means showing the following:

  • You can’t maintain a minimal standard of living for yourself and your dependents based on your current income and expenses.
  • Your financial situation isn’t likely to change during your loan’s term.
  • You’ve made good faith efforts to repay the loan.

Tip: Unlike federal student loans, private loans have a statute of limitations. This means that if your statute of limitations has passed, the lender cannot sue you in court for the debt. If you don’t know the status of your private loans or have stopped paying them, get help before you take further action.

What’s next?

Make sure you understand the terms and conditions of your student loan. Read your promissory note!  Stay in communication with your private loan servicer to avoid defaulting. When in doubt, get help. You don’t want to miss out on any consumer protections.