If you have private student loans, you might be feeling a little jealous right now.
After all, borrowers with student loans held by the federal government received a temporary suspension of payments thanks to coronavirus relief efforts. This relief is called “forbearance” and remains in effect for 2.5 years after the outbreak of the virus.
But there is no general relief program for those who hold the $131 billion in private student loans, which is less than 10% of the $1.75 trillion student loan market, as estimated by the Federal Reserve Bank of St. Louis.
However, you have options if you are struggling to make your private student loan payments.
By understanding what you have and what you can ask for, you will be better prepared to avoid financial disaster.
Federal Loans vs. Private Loans
There is a significant difference between a federal student or parental loan and a private student loan.
As stated in federal law student help websitefederal loans usually come with lower interest rates than private loans (because private lenders try to make money from loans). Federal loans are also more likely to have fixed interest rates and more liberal repayment options.
There are fewer benefits take out a private student loan instead of a federal undergraduate loan. Financial advisers suggest exhausting federal loan options first. However, if you are looking for funds for higher education or need more than federal loans provide, a private loan may be the best option.
If a private loan is needed, shop around. Private lenders offer different interest rates, different loan types (fixed or variable), different repayment options, and different forbearance considerations that could suspend payments due to financial hardship.
Discover who owns your existing student loansyou’ll probably have to call your servicer to inquire about all of them, even loans from the same lender.
But putting together that list is a crucial first step, because confusion could lead to disaster, said a student loan lawyer. Christie Arkovitchwho works with students in Florida.
“studentaid.gov will list all federal loans,” she said. “If your loan is not on this list, you can rest assured that you have a private loan.
On private loans, she noted, a student “will get a notice that the (federal) loans have been suspended and suspended, but they’re still getting bills on other loans,” she said. said, adding that if borrowers assume it’s a paperwork issue, they could end up defaulting on a loan.
Two Types of Federal Student Loans
There are two types of federal loans — at the federal level tenuous student and federal loans supported student loans. The difference:
Loans held by the federal government
Federally held loans are made by the US government and have terms and conditions set by law. Federally held loans include Direct Loans, Subsidized and Unsubsidized Stafford Loans, Parent and Graduate Plus Loans, and Direct Consolidation Loans. They are eligible for benefits from the coronavirus relief bill.
Federally guaranteed loans
Then there are loans backed (or guaranteed) by the federal government, but not owned by it. This group includes the majority of Perkins Loans and Federal Home Education Loans, better known as FFEL Loans.
The FFEL was a federal program mainly administered by public or private bodies. These loans are therefore not eligible for the benefits of the coronavirus relief bill.
And although the program ended in 2010, in the first quarter of 2020, 11.8 million borrowers still owed $257.2 billion in outstanding FFEL loans.
Many states also have student loan payment forgiveness programs in place. Check your state’s official website and state attorney general’s website for eligibility.
Since these loans are guaranteed by the federal government, chances are that their agents will offer the same options that borrowers of federally held student loans receive.
“With FFEL loans, managers can voluntarily do the same type of forbearance that direct loans will now receive from the government,” Arkovich said. “But volunteering can vary from repairer to repairer.”
And that leaves us with the commercially held private loan.
These loans — made by banks, credit unions, and corporations — aren’t guaranteed by the federal government, so they aren’t required to offer the same protections or benefits.
But like many other creditors, student lenders offer help if you’re having trouble paying your bills. It’s just not automatic.
“There is no federal law governing whether loans should be suspended, so contact them and let them know your situation,” said Ryan Law, certified financial adviser and author of Student loan planning. He added that reaching out before payments are due will give you more leverage when negotiating.
3 Options for Negotiating a Breakup
You know you’re struggling to repay your private student loan, but what should you negotiate when talking to the lender? Here are three options.
Forbearance of private lenders is offered on a lender-by-lender, case-by-case basis.
Since private lenders generally follow the lead of the federal government, most have forbearance options, which temporarily defer student loan payments for a period of time.
By skipping your monthly student loan payment, you can save money for other emergency expenses.
However, while the federal government has suspended interest-free payments, a private lender’s forbearance terms may not be as generous.
To avoid any unpleasant surprises at the end of the forbearance, you should ask the following questions to your loan officer:
How long is the abstention period?
Are there any fees associated with accepting a forbearance?
Will interest continue to accrue during this period? How is it added at the end of the period?
What will be my new payment at the end of the forbearance?
You have to consider that any short-term relief could end up hurting even more if you have a higher payment at the end of the period – and you’re still out of a job.
Consider these choices when you try to pay off your student loans faster and with less total repayment.
In addition to the benefits of the relief program, loans held by the federal government also generally offer lower interest rates than commercial loans.
If you are currently in good standing with your lender and still have your job, you may qualify for much better rates and reduce your student loan balance. or you could compare the prices for even better rates with a new lender.
“I wouldn’t recommend refinancing federal loans into private loans,” Law said. “We have seen the benefits of federal loans over the past few years with no payments or interest on federal loans.”
If your agent offers an extended repayment plan, you’ll lower your monthly payments, but end up spending a lot more time and money repaying the loan. Avoid this option if possible.
Refinancing becomes more difficult to obtain as banks begin to tighten lending. It’s also important to note that refinancing usually comes with a fee, which can offset some of the gains from a lower interest rate, making refinancing a better long-term financial strategy.
“I only want someone to refinance if they know they can fix the problem,” Arkovich said. “If they temporarily put it off – if that’s not a solution – then they’ll probably hurt themselves by refinancing.”
And if you’re worried about losing your ability to make payments in the near future, switching to another lender might be a bad choice amid the pandemic. Most relief programs require at least three months of payments to qualify, so you could be on the losing end as a “new” borrower.
3. Rate Reduction
If you’re still able to make your student loan payments – for now – you can also inquire about the lender’s temporary rate reduction program.
In this program, your interest rate is reduced to zero percent for a period of time, usually six months to one year.
Rate cuts aren’t limited to coronavirus-related events, but Arkovich noted that lenders typically don’t advertise this option. “In my experience, it was something that wasn’t offered, but you could always ask for it,” she said.
In a rate reduction program, the lender will reduce your monthly payment. But be aware that depending on the payment structure, less may also be allocated to your main balance. This could mean that the total cost of your loan could be higher at the end of the period.
If a lender offers interest-only payments, resist the temptation. Yes, you’ll pay less each month, but you’ll be obligated to make those payments forever because you’ll never reduce the balance.
But if you have the ability, the program could help you strategize for long-term success by saving on interest.
“Ask for an interest rate cut, then try to pay as much of the principal as you can during that time,” Arkovich said. “Then when it starts earning interest again, the balance is that much smaller.”
And if you can use the rate reduction period to cancel a loan faster, it could free up money if income becomes an issue in the future.
Tiffany Wendeln Connors is editor of The Penny Hoarder. Kent McDill is a regular contributor.
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