Most federal student loan borrowers got a helping hand from the government during the pandemic. Thanks to legislation passed last year and an ordinance by President Biden, individuals with federal student loans can stop repayments until October 1 without incurring interest on the balance.
But that doesn’t help Benny Kuo.
Kuo, a product marketing manager in Oregon, is one of approximately nine million student borrowers who are not eligible for the penalty-free grace period granted to most federal student loan holders. That’s because these loans come from private institutions, not the federal government.
“I was a little frustrated with how the government took a move on federal student loan borrowers, but not privately. I didn’t quite understand why, ”says Kuo. “I felt left out. All of these various members of the community were given a hiatus during that time, while private student loan borrowers did not. “
By the time Kuo completed his MBA program in 2017, he had nearly $ 50,000 in student loans. To lower his interest rate, Kuo refinanced his federal student loans into private student loans through a local credit union in August 2018. The interest rate on his loans rose from 6.8% to 3.27%, with a 5-year amortization schedule.
“I had a good job that was stable enough, and I felt safe that I could lose all of the benefits of government student loans at a lower rate,” says Kuo.
Kuo, who is now 29, has maintained a stable income during the pandemic and plans to have his student loans paid off by September this year, but recognizes that this situation is unusual.
“I am very happy to be still employed during the pandemic. I understand that I’m one of the lucky ones, ”he says.
Data from the Student Borrower Protection Center, a nonprofit, shows that high-income students are more likely to receive student loans from private lenders and generally be able to pay them off over time. While lower-income students and people of color are less likely to borrow, those taking out private student loans often have difficulty paying back, the report said.
How private borrowers have been banned from student loans
Not all student loans are created equal. Private student loan borrowers do not have the same protections as federal student loan borrowers, from the reduction or suspension of payments to repayment assistance options.
“I see it as if the government is saying that the people who went through the federal program did the right things and took a break, but the private borrowers who may have had a misfortune don’t understand,” summarizes Kuo it together.
The pandemic has made this reality clearer and the student loan scheme in the CARES Act is the most obvious example. After several extensions, federal borrowers don’t have to make a single payment for their student debt until October 2021. In the meantime, private student borrowers have had few opportunities to exonerate themselves 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 private student loan companies might offer a three-month or six-month deferral or allow you to skip two months interest-free, ”said Robert Farrington, CEO of The College Investor, a website that advises student borrowers. “But none of that compared to what we’ve seen on federal student loans.”
Even before the pandemic, private student loan borrowers had fewer opportunities to get help. Private borrowers hold about 8% of total student loan debt, but account for nearly 30% of the 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 private student loan terms can vary significantly from lender to lender. Just like car loans and credit cards, private student loan lenders can set their own repayment terms and eligibility requirements. This could be confusing for borrowers and result in them paying more if they don’t understand exactly what they are signing up for.
The industry is also free to design its conditions for repayment assistance.
“There is no such thing as a blanket policy. You could list five different borrowers for student loans and each would say they have five different options for relief when they get something, “says Farrington. “The best way to describe it is through a lot of confusion.”
What private borrowers can do
Even if the federal government doesn’t help those with private student loans, borrowers still have options. If you have a personal student loan, here are some tips to help you pay off your loans and get out of debt.
Start a dialogue with your lender
Experts say that the most important thing right now is to contact your lender, if you aren’t discussing your repayment options then at least sticking to 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 lenders can sue you, seize your wages, or even look for your house, depending on the state. If you need help and haven’t contacted your lender, this should be the first call you make. “
Your home lender may be willing to offer you flexible repayment options, so it’s always worth checking if you’re struggling, Farrington says. 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 a respite or indulgence, too, but these options should be your last resort. If you take a deferral or deferral with a private lender, your loan payments will be temporarily suspended, but interest will still accrue.
“When you’re unemployed or facing other financial difficulties, deferment and tolerance are much better options than not paying your personal loans,” says Farrington.
Make a repayment strategy
Getting rid of your student loan debt requires strategic planning. First things first, get your balance and interest rate, then come up with a payout plan.
To do this, you need to rethink your budget. Go through article by article and see if there are any expenses that you can cut back and redirect onto your loan payments. Any extra cash that you can release can be used directly to reduce your balance. Carpenter says the best way to make a dent in your student loan balance is to make additional payments in addition to your minimum amount due. That’s what Kuo did. He worked out how much interest he was accumulating and paid a monthly premium on top of his principal.
“One ray of hope in all of this is that all student loan borrowers take a close look at their personal situation,” said Matt Carpenter, CEO of College Funding Services, a student loan consultancy in Massachusetts.
After you’ve worked through your budget, there are two of the most popular withdrawal strategies you should consider: the debt snowball and the debt avalanche. If you choose the debt snowball method, you will make minimum payments on all debts except the account with the lowest balance. With the debt avalanche method, you first focus on the account with the highest APR or APR.
Pay attention to the repayment schedule of your student loan, which sets out how much of the payments will be used for interest and how much will be used for the principal balance. If possible, try to match more of your payments to your main balance in order to pay it off faster.
“When you have a mix of federal and personal loans, it’s a good time to put whatever extra funds you have in your budget into those personal loans and try to knock them out, or at least cut them down as much as possible, there.” You don’t have to make federal loan payments, ”Farrington says.
Lower your interest rate by refinancing
Refinancing your personal loan can be a way to significantly reduce your monthly payments thanks to the current low interest rates. If you have high-interest personal loans, refinancing can lower your current interest rate by a few percentage points and save you money in the long run. In contrast to federal borrowers, private borrowers do not lose any protection through refinancing.
“At current prices, you want to shop in order to potentially refinance,” says Carpenter.
Refinancing only makes sense if you can tick certain boxes. To get the best interest rates and loan terms, you need a relatively high credit score, good credit history, and a salary that can keep payments going. You should also make sure that a refinance can save you a significant amount on your loan payments, or it really doesn’t make any sense to do so.
While there isn’t a hard and fast rule of what constitutes good credit, you should be somewhere between the 600s and 700s for a great value.
If you are able to, refinancing can be a very good option and you can have peace of mind too.
Kuo has no regrets about refinancing its federal loans into personal loans, even though repayment of the former has been suspended.
“I felt comfortable taking the risk because I knew I had a better interest rate and I’m saving a lot of time on my student loans,” he says. “It’s much better for my financial goals and my mental health.”