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Most federal student loan borrowers got a helping hand from the government during the pandemic. Thanks to legislation passed last year, plus an executive order from President Biden, people who have federal student loans can stop repaying them until October 1, with no interest accruing on the balance.
But that’s no help to Benny Kuo.
Kuo, a product marketing manager in Oregon, is one of roughly nine million student borrowers ineligible for the penalty-free forbearance period given to most federal student loan holders. That’s because those loans are from private entities, not the federal government.
“I was a little frustrated at how the government took a step for federal student loan borrowers, but not private. I didn’t quite understand why,” says Kuo. “I did feel left out. All of these different constituents of the community were receiving a pause during this time, while private student loans borrowers didn’t.”
When Kuo graduated from his MBA program in 2017, he had nearly $50,000 in student loan debt. In an effort to lower his interest rate, Kuo refinanced his federal student loans into 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 I felt secure that I could lose all the benefits of federal student loans for a lower interest rate,” says Kuo.
Kuo, who’s now 29, has been able to maintain a steady income during the pandemic and plans to have his student loans paid off by September of this year, but he recognizes that this situation is uncommon.
“I feel very fortunate that I’m still employed throughout the pandemic. I understand I am one of the lucky ones,” he says.
Data from the Student Borrower Protection Center, a nonprofit organization, shows that high-income students are more likely to get student loans from private lenders, and that they are generally able to pay them off over time. While students from lower-income backgrounds and students of color are less likely to borrow, the ones who do take on private student loans frequently struggle to repay, the report found.
How Private Student Loan Borrowers Were Left Out
Not all student loans are created equal. Private student loan borrowers don’t have access to the same protections that federal student loan borrowers have, from reducing or pausing payments to opportunities for repayment assistance.
“I see it as the government saying people who went through the federal program did the right things and got a pause, but the private student loans borrowers who may have had misfortune don’t get it,” is how Kuo sums it up.
The pandemic made that reality more clear, and the student loan provision in the CARES Act is the most obvious example. After multiple extensions, federal borrowers aren’t required to make a single payment toward their student debt until October 2021. Meanwhile, private student loan borrowers have had few options to turn to for relief and have largely remained at the mercy of their creditors.
“Many of them offered some sort of relief, but none of them were very generous. Most of the private student loan companies offered maybe a three-month or six-month forbearance or allowed you to skip two months of payment interest-free,” says Robert Farrington, CEO of The College Investor, a site offering advice to student borrowers. “But none of it compared to what we saw with federal student loans.”
Even before the pandemic, private student loan borrowers had fewer options to get help. Private borrowers hold roughly 8% of overall student loan debt, but make up nearly 30% of complaints received by the Consumer Financial Protection Bureau, according to 2020 data.
The private student loan market, with $130 billion in outstanding debt, continues to grow but remains largely unregulated, so the terms and conditions of private student loans can vary significantly from lender to lender. Just like auto loans and credit cards, private student loan lenders can set their own repayment terms and eligibility requirements. This could make it confusing for borrowers, leading them to pay more if they don’t understand exactly what they’re signing up for.
And when it comes to repayment help, the industry is similarly free to set its own terms.
“There’s no blanket policy. You could put five different student loan borrowers and they would all say they got five different means of relief, if they got anything,” says Farrington. “The best way to describe it is a lot of confusion.”
What Private Student Loan Borrowers Can Do
Even though the federal government isn’t helping those with private student loans, borrowers still have options. If you have private student loans, here are some tips to help empower you to pay off your loans and become free of debt.
Start a Dialogue With Your Lender
Experts say the most important thing right now is to get in touch with your lender, if not to discuss your repayment options then at the very least to stay on good terms should you miss a payment. The worst thing you can do is ignore your student loan payments.
“Private student lenders are much more aggressive with their collection tactics,” says Farrington. “Private student loan lenders can sue you, garnish your wages, or even come after your house depending on your state. If you need help and haven’t reached out to your lender, it 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 struggling, says Farrington. 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’s also deferment or forbearance, but those options should be your last resort. When you go into deferment or forbearance with a private lender, your loan payments are temporarily paused, but interest still accrues.
“If you’re unemployed or dealing with other financial hardships, deferment and forbearance are much better options than defaulting on your private loans,” says Farrington.
Make a Repayment Strategy
Getting rid of your student loan debt requires strategic planning. First things first: get a handle on your balance and interest rate, then craft a payoff plan.
In order to do that, you’ll need to revisit your budget. Go item by item, and see if there are expenses you can cut and redirect toward your loan payments. Any extra cash you can free up can go directly to reducing your balance. Carpenter says the best way to make a dent in your student loan balance is to make additional payments on top of your minimum amount due. That’s what Kuo did. He figured out how much he was accruing in interest, and paid extra toward his principal every month.
“One silver lining in all of this is that it has made all student loan borrowers take a good, hard look at their personal situations,” says Matt Carpenter, CEO of College Funding Services, a student loan consultation company in Massachusetts.
Once you’ve gone through your budget, consider two of most popular payoff strategies: the debt snowball and debt avalanche. If you go with the debt snowball method, you’ll make minimum payments on all debts except the account with the lowest balance. With the debt avalanche method, you’ll focus first on the account with the highest APR, or annual percentage rate.
Pay attention to your student loan’s amortization schedule, which determines how much of the payments go to interest and how much to the principal balance. If possible, try to allocate more of your payments toward your principal balance to pay it down faster.
“If you have a mix of federal and private loans, it’s a great time to put any extra you have in your budget toward those private loans and try to knock them out, or at least lower them as much as possible, since you’re not having to make any federal loan payments,” says Farrington.
Lower Your Interest Rate by Refinancing
Refinancing your private loans can be a way to significantly reduce your monthly payments, thanks to the low interest rates right now. If you have high-interest private loans, a refinance can shave a few percentage points off of your current interest rate and save you money over time. Unlike federal borrowers, private borrowers don’t lose any protections by refinancing.
“With where rates are now, you want to shop to potentially refinance,” says Carpenter.
But refinancing only makes sense if you can check certain boxes. To get the best rates and loan terms, you’ll need a relatively high credit score, a good credit history, and a salary that can sustain the payments. You’ll also want to make sure you can save a significant amount on your loan payments by refinancing, or there’s really no point in doing it.
While there is no hard and fast rule on what constitutes a good credit score, you’ll want to be in the high 600s and 700sto get an attractive rate.
If you are able to do it, then refinancing may be a very good option, and it could buy you peace of mind as well.
Kuo doesn’t regret refinancing his federal loans into private ones, even though repayment on the former has been suspended.
“I felt comfortable taking the risk knowing that I got a better interest rate, and I am shaving a considerable amount of time off my student loans,” he says. “It’s much better for my financial goals and mental health.”