Banks and other financial institutions make private student loans, which are separate from federal student loans. Private student loans receive no direct benefit from the U.S. Department of Education. (To learn more about the differences between federal and private student loans, see Overview of Student Loans.)
If you have federal student loans, you have access to many different repayment plans and other alternatives—like deferment, forbearance, and cancellation options—but private student loans are a different story. Which options you’ll get, if any, depends on the terms of your loan agreement, your lender, and to some extent the law.
Read on to learn about potential repayment options for private student loans.
Before you do anything else, get a copy of your loan agreement. Private loan terms vary widely. If you don't have a copy of your loan agreement, call your servicer and ask for one. Read the contract to determine if it includes repayment options.
Under the terms of the agreement—or based on the lender’s policies or the law—you might be eligible for one or more of the following options.
Most private loan agreements include an in-school interest deferment option. This means you can choose to pay the interest as it accrues while you’re in school or you can put off paying it and capitalize the accrued interest when you enter repayment. (“Capitalizing” the interest means adding it to the outstanding loan amount.)
You might be eligible to enter into a forbearance for three to nine months. With a forbearance, the lender allows you to stop making payments, or to pay a lesser amount, for a specific period of time.
Lenders used to grant forbearance more liberally, but the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) issued guidance that forbearances beyond nine months are inappropriate for private student loans.
Private lenders have more flexibility than federal student loan servicers to rework your loan. This flexibility is partly because a borrower can refinance at any time with another private lender and partly because private loans aren’t subject to Department of Education regulations restricting what the lender can accept. The FDIC and OCC allow lenders to offer loan modifications, workout plans, and temporary interest rate reductions for private student loans. Private lenders determine each of these options on a case-by-case basis.
Modifications. Lenders can permanently modify the principal, interest, or term length on private student loans.
Workout plans. Lenders can allow you to make up missing payments over time without permanently modifying the loan.
Temporary rate reductions. Some lenders will reduce the interest rate, making it easier for you to catch up on payments.
If you’re not in default, you might be able to refinance. Private student loans were popular before the 2008 financial crisis. As default rates increased, most financial institutions stopped lending to students. Since 2014, though, private lenders are once again offering private student loans and various refinance options. The terms of these loans vary widely, so it’s best to shop around. If you have good credit and income, you could qualify for a lower interest rate or an extended term. If you’re in default, you’ll need a creditworthy cosigner to refinance.
While you can cancel federal student loans under certain circumstances, private student loan lenders rarely cancel loans. However, in the event of death or permanent disability of the student, it can happen. To find out about cancellation options, contact the servicer to determine if it has a death or disability cancellation policy, especially if the borrower qualifies for a death or disability discharge of a federal loan.
Also, it’s rare but possible to discharge (eliminate) student loans in bankruptcy. (For more information, see Student Loan Debt in Bankruptcy.)
If you’ve defaulted on a private student loan, state law will determine the statute of limitations on the debt. A private lender must file a lawsuit within this period in order to collect the debt through garnishment or attaching to your other assets. You should expect a private lender to file a lawsuit within this period.
Even if the lender hasn’t filed a lawsuit yet, you can negotiate a settlement after default. A good tactic could be to figure out how much the lender might be able to collect from you through garnishment and offer a repayment plan in the amount that can be garnished. (To find out about garnishment laws, see If Your Wages Are Garnished: Your Rights.)
Even if the debt is valid, you might have a claim or defense that prevents the lender from recovering the full amount of the debt. Borrowers have rights under the Truth in Lending Act (TILA) against private lenders that don’t apply to federal loans. The statute of limitations is only one year. So you have a limited time to sue if you lender violates this law.
Also, the Fair Debt Collection Practices Act (FDCPA) applies to student loan debt collectors, but does not apply to creditors collecting debts they own.
The Consumer Financial Protection Bureau has sued several for-profit schools in the last few years based on Truth in Lending, unfair and deceptive practices, and Fair Debt Collection Practices Act claims relating to private student loans. These schools are:
If you attended one of these schools and have a private loan, you should have been notified about these actions and the status of your loans. If you haven’t been contacted, you should look into these matters. As of April 2018, the enforcement action against ITT is still ongoing, but some private loans from Corinthian and Bridgepoint have been forgiven. You shouldn’t refinance any loans from any of these institutions until you know that the debt is valid and enforceable.
To find out more about available repayment options for your private student loans, ask your servicer.
If you need help interpreting a private student loan agreement, want assistance negotiating a workout or settlement with a private student loan lender, or are having trouble getting a straight answer from your loan servicer about your available options, consider consulting with a student loan attorney or debt negotiation attorney.