Many people want to better manage their student loans and optimize how they repay them. There are a variety of ways to achieve this, but (as is the case throughout many aspects of the student loan world) understanding the confusing array of options can be challenging.
In my next several articles, I’m going to give you a crash course in student loan “consolidation,” “modification,” and “refinancing.” People often casually use these terms interchangeably, but they actually can mean very different things, and it’s important to understand their definitions.
Last week, I discussed student loan consolidation. Today’s post is about student loan modification.
Student Loan Modification
A modification is a change to the terms and conditions governing the repayment of an existing student loan. Unlike consolidation, it’s not a new loan; you keep your same student loan, just with some changes (hopefully good ones).
For federal student loans, there is no real way to modify the terms and conditions, since they are governed by federal laws. But the good news here is that federal student loan terms already include a wide variety of repayment options for borrowers, including income-driven repayment and the possibility of loan forgiveness, and generous deferment and forbearance rights during times of hardship.
For private student loans, which generally have far less favorable terms as compared to federal student loans, some lenders may offer temporary or long-term modifications (such as changing the length of your repayment term, or modifying the loan’s interest rate) to allow for lower payments and greater flexibility during times of economic hardship. This has historically been a non-existent option for private student loan borrowers, but lenders have been slowly growing more comfortable with modifications. For delinquent borrowers who experienced a temporary economic hardship that caused them to fall behind on payments, more 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 loan’s repayment term and starting fresh the following month. This is quite similar to some home mortgage modifications that mortgage lenders began offering to people after the housing market crash. Other private lenders may offer temporarily reduced interest rates, coupled with interest-only payments, to give distressed borrowers some temporary relief.
Right now, these private student loan modification programs are fairly limited in scope and are only being offered by a few 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).
Bottom line? Student loan modifications are possible depending on your loan type and lender, but they are still pretty difficult to get.
Next week, I’ll talk about student loan refinancing, which is becoming more widely available than student loan modifications.