In a previous article, we briefly touched on refinancing and how that impacts private student loans compared to federal student loans, especially during the pandemic. It’s important to understand what relief is available on the private end for you.
It’s been a tough year and aside from paying back your student loans, there are those lights to keep on, food to keep you alive, and a roof over your head that has taken precedence.
Paying off student loan debt doesn’t take precedence these days and unfortunately, the current freeze doesn’t apply to private ones. While repayment efforts on federal loans have been paused for over a year and will remain on hold until at least through September 2021, where’s your relief? Good question.
What Is a Private Student Loan?
I want to clarify the difference between a private student loan and a federal student loan. For this, I’ve turned to Studentaid.gov.
- Federal student loans are funded by the federal government.
- Private student loans are non federal loans, made by a lender such as a bank, credit union, state agency, or a school.
According to CNBC, private student loans currently amount to $130 billion, about 8% of total school debt. That’s an increase of more than 70% in the last 10 years. Unfortunately, the prospect of future legislation to relieve private student loan borrowers is rather dim. There seems little hope that Congress will try to ease the burdens of private loan debtors.
So what can you do? Will a superhero come and rescue you? Sort of.
The HEROES Act
Last fall, there was some speculation that Congress might help private student debtors. The relief was proposed in the form of an update to the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act.
Originally passed in May 2020, the bill contained several measures to stimulate the economy, including benefits for low-income job-training, health care, veterans, and many other groups.
The HEROES Act also included an “extension of student loan forbearance to all federal and private loans through September 2021 and forgiveness of up to $10,000 in student debt,” says Investopedia.com. It seemed as if your superhero arrived, cape and all, ready to save the day. So, what happened?
The act was put on the back burner as other relief packages have come to fruition instead and the momentum for measures to relieve private student debt seems to have stopped. There goes your superhero. Argh.
Few believe there’s any chance of it happening via legislation, which is frustrating for private student debtors. Even more exasperating, the proposed relief wouldn’t have covered all private student debtors.
It would have only applied to those in “economic distress.” According to Forbes.com, that term would apply only to a borrower who “would otherwise pay $0 monthly through an income-driven repayment plan, was in student loan default, or was 90 days delinquent on their student loans.”
“It’s harder to prove undue hardship with private loans since they don’t have as many safeguards as federal loans do, such as income-driven repayment,” says Nerdwallet.com.
That cuts a lot of borrowers out of the equation. What gives?
What Relief Measures Are Still Possible
Some financial and political analysts dosee a sliver of hope for private loan debtors, which hinges on the possibility of bankruptcy reform. According to Yahoo! Finance, the past decade has seen more than 2.5 million student loan debtors file for bankruptcy.
Recent court actions at the state and federal levels have eliminated some student loan debts. New York courts have done so twice, discharging the debt from parties who declared bankruptcy. A couple in Colorado who had 11 private loan accounts won a case in a federal appellate court, eliminating $200,000 of debt off their backs. WOW! Now that’s superhero status!
How Bankruptcy Reform Might Help Private Debtors
These rulings could set precedents for bankruptcy reform down the road. Fingers and capes crossed. Current bankruptcy codes, according to Forbes.com, treat student debt differently than other forms of debt. They require borrowers to prove they had “undue hardship” to get their student loan dismissed. What’s more, the definition of “undue hardship” isn’t established consistently so the determination is up to the presiding judge in each case.
Officially, of course, the prospect of bankruptcy reform remains speculative, but many experts believe it may occur within the next few years.
Can Your Lender Help?
Whatever hope these eventual changes might inspire, they don’t do much for debtors right now. Given the often glacial process of enacting reform, it could happen too late for some.
What private student loan debtors can do is communicate with their lenders to discover what relief, if any, is available. Many of these institutions are offering some assistance as the COVID pandemic wears on.
Some private lenders are offering emergency loan forbearance for a limited time, typically two or three months. While it’s not quite the same far-reaching relief federal debtors are getting, it’s still significant. The Lending Tree’s Student Loan Hero outlines what some of the higher-profile private lenders are doing to ease the burden.
Relief Options for Some States
Recently, a multi-state coalition reached an agreement with lenders and loan servicers to give COVID relief to private loan debtors. The agreement includes waiving late payment fees and helping debtors enroll in assistance programs. It also stops collection efforts, including lawsuits, for 90 days. Further, lenders and servicers have agreed to report their accounts as being in good standing to credit bureaus.
However, this agreement only covers a few areas, including California, Colorado, Connecticut, Illinois, Massachusetts, New Jersey, Vermont, Virginia, Washington, and Washington, DC. New York State has its own program apart from the coalition. The benefits don’t start automatically and you still have to talk to your loan servicer to get them rolling.
There are other potential avenues for those laboring under private student loan debt. Loan consolidation, reallocating payments, and refinancing are ways borrowers can get control over their debt in “normal” times. If you’re still working, your employer may have some loan repayment initiatives you’re not aware of.
Despite the hope of future legislation, the law will not make it easy for private student loan debtors to ease their strain. You’ll have to do a lot of the legwork, however, to survive through the end of the pandemic, it may be well worth it.
Stay educated, talk to your lender, and understand what options are available to you, even if they just help a little. A little will keep those lights on, food in your belly, and a roof over your head. I hope your superhero rescues you soon…we all deserve a superhero in these unprecedented times.
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