If you have privately held student loans, you might be feeling a little jealous right now.
After all, those borrowers with federally held student loans received a temporary break on payments, thanks to the coronavirus relief bill.
But there’s no blanket relief package for those holding the $123 billion in private student loans, which accounts for 7.76% of the $1.61 trillion student loan market, according to a 2019 MeasureOne private student loan report.
However, you do have options if you’re struggling to make your private student loan payments — let’s look at them.
What to Do About Private Student Loans During COVID-19
Considering how dire the situation may be for some who have lost income or their ability to work due to the COVID-19 pandemic, figuring out what to do about your student loans may seem like an overwhelming task.
But by understanding what you have and what you can ask for, you’ll be better prepared to avoid a financial catastrophe.
Who Owns Your Student Loans?
It’s tough to ask what your options are if you don’t know who to ask.
To find out who owns your student loans, you’ll likely have to call your servicers to ask about each one — even loans from the same lender.
But gathering that list is a critical first step, since confusion could lead to disaster, said student loan attorney Christie Arkovich.
“They’ll receive one notice that says that the [federal] loans have been suspended and put into forbearance, but they keep getting bills on other loans,” she said, adding that if borrowers assume it’s a paperwork issue, they could end up defaulting on a loan.
First, let’s clear up some confusion about federally held student loans vs. federally backed student loans.
Federally held loans are made by the U.S. government and have terms and conditions set by law. Loans that are owned by the federal government include Direct Loans, subsidized and unsubsidized Stafford loans, Parent and Graduate Plus loans and direct consolidation loans. They qualify for the coronavirus relief bill benefits.
Then, there are loans backed (or guaranteed) by the federal government, but not owned by them. That group includes the majority of the Perkins loans and Federal Family Education Loans, better known as FFEL loans. (I know, the word “loans” repeats. I don’t name them.)
FFEL was a federal program that was mostly administered by state or private agencies. So those loans don’t qualify for the coronavirus relief bill benefits.
And although the program ended in 2010, as of the first quarter of 2020, 11.8 million borrowers still owed $257.2 billion in outstanding FFEL loans.
Many states have also implemented student loan payment waiver programs. Check with your state’s official website and the state’s attorney general website for eligibility.
Because those loans are federally backed, there’s a good chance their servicers will offer the same options that federally held student loan borrowers are receiving. Probably.
“With the FFEL loans, the servicers can voluntarily do the same kind of forbearance that the direct loans are going to now receive from the government,” Arkovich said. “But voluntary might vary from servicer to servicer.”
Perkins loans were low-interest federal student loans for those with exceptional financial need — that program ended in 2017. The loans were mostly owned by the colleges and universities that distributed them.
If you’re having trouble making the payments on your Perkins loans, your best course of action is to reach out to your school’s financial aid office or the loan servicer who handles them for the institution.
And that leaves us with the commercially held private loan.
These loans — made by banks, credit unions and corporations — aren’t backed by the federal government, so they aren’t required to offer any of the same protections or benefits.
But like a lot of other creditors, student loan lenders are offering assistance if you’re struggling to pay your bills due to the coronavirus. It’s just not automatic.
“There’s no federal law governing whether the loans have to be put on hold, so contact them and let them know what your circumstances are,” said Ryan Law, an Accredited Financial Counselor and owner of Student Loan Planning. He added that reaching out before payments are due will give you more leverage when negotiating.
What should you negotiate for? Here are a few options.
If you ask a financial adviser what’s the best plan — given the uncertainty of how long the economic fallout from the pandemic may last — you typically get this response: Hold onto your cash.
And since private lenders are generally following the federal government’s lead, most have forbearance options, which temporarily postpone payments on student loans for a period of time.
By skipping your monthly student loan payment, you can hold onto the cash for other emergency expenses.
However, while the federal government suspended payments for six months without interest, a private lender’s terms for forbearance may not be as generous.
To avoid any unwelcome surprises at the end of the forbearance, you should ask your loan servicer the following questions:
- How long is the forbearance 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? Is the interest capitalized?
- What will be my new payment at the end of the forbearance?
And although it may be difficult to think beyond what’s for dinner right now, you must 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 work.
In addition to the relief package benefits, federally held loans also typically offer lower interest rates compared to commercial loans.
So perhaps one of the few upsides of the current pandemic is that the government has been lowering interest rates in an effort to revive the economy.
If you’re currently in good standing with your lender and still have your job, you could qualify for much better rates and put a dent in your student loan balance. Or you could shop around for even better rates with a new lender.
“Rates are pretty low, so if you’re holding private student loans and you can refinance to a better rate, I say why not,” Law said. “If you can make the same payment but be paying more principal each month, then absolutely do it.”
If your servicer offers an extended repayment plan, you’d reduce your monthly payments, but you’ll end up spending a lot more time and money to pay off the loan. Avoid this option if possible.
However, refinancing is becoming more difficult to qualify for as banks begin to tighten lending, so if you’re considering this option, it’s best to move quickly.
It’s also important to note that refinancing typically comes with fees, which can offset some of the gains from a lower interest rate, which makes 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’re just temporarily putting it at bay — If it’s not a fix — then they’ll probably just hurt themselves by refinancing.”
And if there’s any concern that you’ll lose your ability to make payments in the near future, switching to a different lender could be a bad choice amid the pandemic. Most relief programs require at least three months of payments to qualify, so you could lose out as a “new” borrower.
3. Rate Reduction
If you still have the ability to make your student loan payments — for now — you could also ask about the lender’s temporary rate reduction program.
In this program, your interest rate is reduced to as low as zero percent for a period of time, typically from six months up to a year.
Rate reductions aren’t limited to coronavirus-related events, but Arkovich noted that lenders don’t typically advertise this option. “In my experience, this 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 be going toward your principal balance, too. That could mean your total loan cost may be higher by the end of the period.
If a lender offers interest-only payments, resist the temptation. Yes, you’ll fork over less each month, but you’ll be stuck making 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 interest rate reduction and then try to pay as much as they can toward the principal during that time,” Arkovich said. “Then when it starts accruing interest again, the balance is that much smaller.”
And if you can use the rate-reduction period to wipe out a loan faster, it could free up some cash if income becomes an issue in the future.
Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.