Private student loans are, in my opinion, generally terrible. Why? Because their terms and conditions are very inflexible compared to federal student loans and some other types of consumer debt. Private student loan borrowers are typically stuck with whatever interest rate they have (which is often quite high), and they have very little choice about their repayment terms.
When private student loan borrowers experience some sort of hardship or distress and they can’t afford their monthly payments, even on a temporary basis, obtaining any sort of relief from their lender or servicer can be extremely difficult. Deferment and forbearance options are typically quite limited, any change in repayment terms will be temporary (if even offered at all), and default can occur quite quickly once the borrower starts falling behind on monthly payments.
But recently, some major private student loan lenders have been offering a new way out for distressed borrowers: private student loan modifications. For example, private student loan lenders may lower a borrower’s interest rate, or lengthen the repayment term of the loan, to reduce the borrower’s monthly payments. For delinquent borrowers who experienced a temporary economic hardship that caused them to fall behind on payments, some private lenders have been offering modification programs where a borrower can “catch up” on past-due payments by tacking on the past-due amount to the end of the repayment term and starting fresh the following month. This is quite similar to some home mortgage modifications that lenders began offering to people after the housing market crash.
Right now, these modification programs are fairly limited in scope and are only being offered by a few private student loan lenders. They also are largely discretionary programs. This means that most private student loan borrowers do not have a contractual or statutory “right” to modifications of their loan terms; the lender has control over whether or not to grant such relief to the borrower. (Even where the loan contract itself allows for certain nominal modifications of the loan terms, it usually includes language that gives the lender “discretion” over whether to grant it.)
But I think it is encouraging that lenders are voluntarily offering such programs, even if they are limited in scope right now. I hope that this is a sign of things to come, and perhaps with the help of national student loan reform legislation, we can create more incentives for loan companies to work with borrowers who want to do the right thing, but just need things to be a little bit easier.
