Here’s what you need to know about repayment options for private student loans

Millions of Americans are weighed down with student loan debt. This debt is contributing to record low home ownership rates and decreasing birth rates among millennials. If you’re one of these borrowers, there are ways to manage your debt and to get help if you’re falling behind on payments. However, if yours is a private student loan, your repayment options are limited. Here’s what you need to know:

What’s the difference between private and federal loans?

Federal student loans are funded by the federal government, have fixed interest rates that tend to be lower than private loans, and offer more repayment options. Private student loans are funded by a bank, credit union, state agency, or school, and make up a much smaller percentage of the student loan marketplace. They also lack many of the benefits offered by federal loans, including:

No credit check

Most federal student loans do not require a credit check, but private student loans do. This means a student with little or no credit history may need a cosigner to get approved for a private loan. 

Consideration of financial need

The federal loan approval process takes your financial need into consideration, but private loans do not.  

Delayed payment schedule

With federal loans you’re not required to start payments until after graduation or if your enrollment drops below 50 percent. However, private loans may require you to make payments while still in school.

Income-driven repayment options

Federal loans offer many repayment options that may make loan payments more manageable.  These options, which are not available on private student loans, include: 

  • Income-based repayment (IBR)
  • Income-contingent repayment (ICR)
  • Income-sensitive repayment (ISR)
  • Pay-as-you-earn repayment (PAYE) 
  • Revised pay-as-you-earn repayment (REPAYE))

Direct consolidation 

This option allows you to combine multiple federal student loans under one fixed-rate loan based on the average of the interest rates on those loans. This is not an option if you have a private loan, but there is an alternative to consolidation for private loans, which we address below.

Possibility for loan forgiveness

There are a number of loan forgiveness programs for federal student loan borrowers that work in public service jobs. These programs are not open to private student loan borrowers. 

“There’s almost never a reason to let a federal student loan go into default when there are so many repayment options,” said Michael Bovee, co-founder of Resolve. “You don’t have those with private loans.”

Private student loans make up less than 10 percent of the marketplace, but this still represents more than $100 billion in loans, according to a recent study from MeasureOne, a higher education data and analytics firm. Much of this is due to increased tuition costs and borrower need for additional funding.

Some borrowers also get lured in by the marketing tactics of the lenders or schools that are incentivized to promote private loans, Bovee said. 

“As you take out a student loan with the intention to pay it back, federal loans are generally better because they are less expensive,” Bovee explained. “Having said that, having a private student loan could work in your favor if you fall behind.”

What if I can’t pay my private student loan?

If you are in danger of falling behind on your private loan and your financial challenge is temporary, you may be able to get a deferment or forbearance, just as you can with a federal student loan. Both give you a break from making your payments for a short period. The main difference is that under a deferment you may not be responsible for the interest that accrues during that period, while with a forbearance you are. Generally, this interest must be paid as it accrues or is added to the balance.

If your financial challenges will be long-term, it’s important to understand what you can and can’t do to resolve your debt. 

You can’t include your private student loan in:

Chapter 7 bankruptcy

For the most part, student loans cannot be included in Chapter 7 bankruptcy cases. There are some rare exceptions, such as hardship circumstances that must be substantiated through a challenging and expensive process called Adversary Proceedings. This means that if you file Chapter 7 to resolve your debt issues, you still must continue paying on your student loans whether they are federal or private.

A debt management plan

Student loans cannot currently be included in debt management plans (DMPs). If you have other debt and plan to work with a credit counseling agency to reduce your interest rates and consolidate payments, your student loan will not be included. 

You can, however:

Consolidate 

Consolidating your debt under one loan can enable you to lower your interest rate and monthly payments to make them more manageable. You can take out a debt consolidation or personal loan and include any unsecured debt, such as federal or private student loans. This doesn’t reduce the amount you owe, but the lower interest rate allows you to pay the debt off more quickly. Plus, if you end up in financial constraints again, a personal loan can be included in a bankruptcy case. 

Settle

Unlike with federal student loans, you can negotiate a settlement to pay less than what you owe on your private student loans. Each case is considered individually by the creditor, but, in many circumstances negotiating can result in greatly reducing student loan debt – sometimes by as much as 50 percent. 

How do I communicate with lenders?

There can be many names borrowers see on student loan documents – the original lender, the servicer and even the company that actually collects your loan payments. Knowing which one to contact can be confusing. And even when you do, each can handle things a little differently. Here’s a look at three key players in the private student loan marketplace, along with guidance for how best to communicate about your loan and repayment needs: 

Navient 

Navient spun off from Sallie Mae in 2014. It is a loan issuer, servicer and collector of both private and federal student loans with more than 12 million customers. It can be aggressive in communications with borrowers who fall behind on payments, but it is slow to charge off accounts, offers a variety of programs to help with short-term financial challenges, and will negotiate settlements. Learn more about Navient here.

National Collegiate Trust (NCT) 

NCT is one of the nation’s largest holders of private student loan debt. It is not a company but a set of trusts used to purchase private student loans from lenders. As such, it often does not communicate directly with borrowers but uses servicers, such as American Education Services (AES). The accounts will stay with the servicer unless it is sent to collections or an attorney. The service is who you will communicate with if you need information or have issues making your loan payments. Learn more about NCT here.

American Education Services (AES)

AES doesn’t actually loan money, but manages accounts for companies that do. It is owned by the Pennsylvania Higher Education Assistance Agency (PHEA), which is the nation’s second largest private student loan servicer. AES also services loans under the Federal Family Education Loan program. Regardless of lender, if AES is the servicer, they are the entity you will deal with to make payments or address challenges making payments. Learn more about AES here.

What steps do I take to resolve my student loan debt?

Your first step is to understand if your loan is private or federal. You can log into the National Student Loan Database (NSLDS) to see if your loan is listed. 

“Since it will only show federal loans, you can use the process of elimination to find out which loans aren’t showing. If a loan doesn’t show up in the NSLDS database, nine times out of ten it will be a private loan,” Andrew Weber, NACCC certified student loan counselor, wrote in an article on MyCreditCounselor.net

You can also reference your credit report to see what types of loans you have. 

“It’s not always easy to tell federal from private loans on a credit report, but generally a federal loan will say ‘US Dept. of Ed’ or something similar; while private loans will show up the same way as any other type of unsecured debt,” Weber wrote. “If you see a ‘charge off’ for a student loan, that means that it’s private, because this is a mechanism that only occurs with private student loans. A federal loan will list as defaulted or another related term if it is more than nine months behind.”

At this point, it’s not ideal to ignore your loans. It’s a good idea, especially with federal loans, to explore the variety of repayment plans before you miss a payment. The route to negotiating a settlement for your private loan may give you a bit more time, but it’s still a good idea to proactively contact your lender at the right time for the best settlement.

“Unlike federal loans, defaulted private loans will rarely become current again by making payments and will instead remain in a permanent charged off status until the account is paid off,” Weber explained. “It is faster and less expensive to negotiate a settlement, but it is more difficult since most lenders and loan collectors would rather take payments on the full balance than agree to a settlement.”

Why Resolve?

While you may have fewer options with private loans, you do still have options. An expert like Weber or one of the other debt experts on the Resolve team can help you assess these and make wise choices.

You can access the Resolve financial management platform and receive guidance from our experts for free. Get started here

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