Private student loan borrowers have received no help during the pandemic
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Most federal student loan borrowers received a helping hand from the government during the pandemic. Thanks to legislation passed last year, as well as an executive order from President Biden, people with federal student loans can stop repaying them until October 1, with no accrued interest on the balance.
But that doesn’t help Benny Kuo.
Kuo, director of product marketing 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 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 were given a break during this period, unlike the private borrowers of student loans. “
When Kuo graduated from his MBA program in 2017, he had nearly $ 50,000 in student 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 his loans went from 6.8% to 3.27%, with a 5-year repayment plan.
“I had a good job that was stable enough and felt sure I could lose all the benefits of federal student loans for a lower interest rate,” says Kuo.
Kuo, who is now 29, has been 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 that I am still employed throughout the duration of the pandemic. I understand that I am one of the lucky ones, ”he says.
Data from the Student Borrower Protection Center, a non-profit 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 excluded
Not all student loans are created equal. Private student loan borrowers do not have access to the same protections as federal 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 had their hard times don’t understand,” 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 to repay 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 have offered a three- or six-month forbearance or allowed you to skip two months of interest-free payments, ”says 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 borrowers had fewer options for getting help. Private borrowers hold around 8% of total 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 of private student loans can vary widely from lender to lender. Much like auto loans and credit cards, private lenders can set their own repayment terms and eligibility criteria. This could create confusion for borrowers, causing them to pay more if they don’t understand exactly what they are paying for.
And when it comes to repayment assistance, the industry is also free to set its own conditions.
“There is no general policy. You could put five different student borrowers and they would all say they got five different ways of relief, if they get anything, ”Farrington says. “The best way to describe it is a lot of confusion.”
What private 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 out of debt.
Start a dialogue with your lender
Experts say the most important thing right now is to contact your lender, if not to discuss your repayment options, at the very 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 in their collection tactics,” says Farrington. “Private student loan lenders can sue you, garnish your paycheck, or even pick up your house depending on your condition. If you need help and haven’t contacted your lender, this should be the first call you make. “
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 a reprieve or tolerance, but these options should be your last resort. When you postpone or forbear with a private lender, your loan payments are temporarily suspended, but interest still accrues.
“If you are unemployed or facing other financial difficulties, stay and forbearance are much better options than defaulting on your private loans,” says Farrington.
Make a repayment strategy
Getting rid of your student debt requires strategic planning. First things first: check your balance and interest rate, then come up with a payment 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 towards your loan payments. Any additional money that you can free up can go directly to reducing 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 figured out how much he was accumulating in interest and paid extra for his principal each month.
“One positive aspect of all of this is that it has allowed all student loan borrowers to take a serious look at their personal circumstances,” says Matt Carpenter, CEO of College Funding Services, a student loan consultancy in Massachusetts.
Once you’ve gone through your budget, consider two of the most popular repayment strategies: Debt Snowball and 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 will first focus on the account with the highest APR or annual percentage rate.
Pay attention to your student loan amortization schedule, which determines the portion of interest payments and the portion of the principal balance. If possible, try to allocate more of your payments to your main 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, ”Farrington says.
Lower your interest rate by refinancing
Refinancing your private loans can be a way to significantly reduce your monthly payments, thanks to the current low interest rates. 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 protection when refinancing.
“With the current rate situation, you want to shop to potentially refinance,” says Carpenter.
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 isn’t a hard and fast rule of what constitutes a good credit score, you’ll 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 its federal loans into private loans, even though the repayment of the former has been suspended.
“I felt comfortable taking the risk knowing I was getting 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.”