If you’ve been following this blog, you’ve probably seen at least some relatively good news about federal student loans. You can consolidate. You can get a payment plan that caps your payments at a percentage of your income. You can get some of your loans forgiven or cancelled if you work in certain professions. You can postpone your payments if you become unemployed or have difficulty paying your bills.
Unfortunately, private student loans are a whole different ballgame.
Don’t get me wrong, there are some benefits to private student loans. They are easier to obtain in some respects than federal student loans. For example, you don’t have to worry about college financial aid application cycles, or filling out the Free Application for Federal Student Aid (aka, the “FAFSA” form). They also offer greater flexibility in origination fees and interest rates.
But private student loans don’t have the same built-in rights and protections that federal student loans have. There are usually fewer, and less favorable, repayment plan options. Consolidation options are also limited. Depending on the loan terms, the lender may have broad discretion in determining whether or not to grant you a deferment of payments during difficult economic times; and studies have shown that private lenders are increasingly opting to default unpaid student loans and sell them to collections agencies, rather than grant extended forbearances. In this way, private student loans become much like credit card debt. And unlike credit card debt, these loans (with rare exception) will have to be repaid, even if you declare bankruptcy. (The same is generally true of federal student loans, but you have more options to help you avoid default for your federal loans.)
It is not an entirely hopeless situation. Sometimes, with the help of an attorney, a borrower who is unemployed or in financial distress can pursuade a private lender to temporarily postpone or reduce payments. Recently, private lenders have been slightly more receptive to granting temporary relief to distressed borrowers, particularly when they are able to clearly prove their financial situation. Lenders have their own criteria for granting temporary relief, and they usually decide these matters on a case-by-case basis.
Unless we see nationwide student loan reform that specifically includes private student loans, student borrowers will not have many rights outside of federal student loans. Stick to the federal student loans if you can– and if you must take out private student loans, just know that they come with fewer rights, and potentially greater risks.