Back in May, Sen. Elizabeth
Warren, D-Mass., introduced the Bank on Students Emergency Loan
Refinancing Act, a bill that would have allowed borrowers to refinance their
private student loans into the federal loan program, under
existing federal loan interest rates. These loans would then be eligible
for many of the lower payment and forgiveness
benefits available to federal
loan borrowers.
Despite a companion bill in the
House, extensive media coverage and a respectable number of co-sponsors, the
bill failed to move to a vote. However, it gave many private loan borrowers struggling with their
payments some hope. After all, as
those of you with private student loans know, they can be almost impossible to
negotiate if you cannot afford your payments.
If you're
wondering why private loan lenders are so inflexible, it's
because in many cases they have to be. Here's a look at why.
The Rules for Retail Credit
Private student loans fall
under a category called retail credit, and all its associated rules and
multiple state and federal regulators. With very few exceptions, lenders of
retail credit are not allowed to offer any programs or alternatives to a loan
that would substantially alter the terms of the loan.
In general, this has been
understood to mean that any relief, whether it be interest-only payments or forbearance, can’t be offered for
more than six months total, or 12 months in extreme circumstances. While this
can be useful if you’re unemployed for a few months, it will only prolong the
inevitable if you simply have a high debt and a low income.
Ironically, lenders have a lot
more freedom once the loan defaults. In the world of private student loans, the
loan is considered in default or charged off after it becomes 120 days past
due.
A charged-off loan is
deemed severely past due or uncollectable on the books, but that doesn’t mean
the borrower still doesn’t owe the debt. What it does mean is that
altering the terms of the loan won’t run the lender afoul of its regulators’
accounting requirements and the retail credit rules.
Unfortunately, a severely
delinquent loan is also an expensive loan to manage, so it may be more
cost-effective for a lender to sell charged-off loans to a collection agency at
a discount than to spend the time working out an alternative payment plan with
a borrower who may or may not fulfill their side of the agreement. So, don’t
intentionally go past due in the hopes of altering the terms or getting more
repayment options on your loan.
Options for Private Loan
Borrowers
There are a few things a
borrower who is struggling with private loans can do.
First, take a long, hard look
at your budget and sort out the wants from the needs. Second, if you have
federal loans as well, get that
payment down as low as you
possibly can via the lower payment options or even deferment. If you can do
either of these, put that extra money toward your private loans.
Also, check to see if you can
get a lower interest rate and maybe extend your payment term via consolidation.
There are quite a few private
loan consolidation products out
there now.
If you do default on your
private loan, it’s worth trying to talk
to the lender as soon as possible to
attempt to work out an alternative payment plan. If you aren’t successful, it’s
not a bad idea to send as much as you can per month, every month.
Unfortunately, a defaulted private loan is ripe for litigation, but that tactic
can be very expensive and a collection agency is less likely to take that action
on a borrower who is making a good-faith effort to pay.
Finally, if you have a problem
with your private student loan, you can file a complaint with the Consumer Financial Protection Bureau.
It’s important to understand the terms and conditions of your Education Loan Private before
signing on the dotted line. The first bill is not the time to figure out that
your loan payments are not affordable, especially when the alternatives
are so few.
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