Student Visa

Student Loans-Private Loans

Summary of topics:

Student Loans

Private Loans
Working on Student Loan Debt

The private loan business has grown rapidly thanks to the rising cost of college and limits of federal student loans. These loans are intended to fill the gap between available federal aid and what students and families can afford to pay out-of-pocket for college costs. Unfortunately a lot of college students take out these private loans without completely exhausting their other options (federal loans, scholarships and grants). Private loans don’t have affordable fixed rates and payment plans like federal loans do. Prospective borrowers should exhaust all federal grant and loan options (even PLUS loans) before considering a private student loan.
Banks and other financial institutions make private student loans without any financial backing from the federal government. Some schools also have their own private loan products.
Interest accrues on all private loans from the time they are disbursed, although interest costs can sometimes be deferred and capitalized when repayment begins. There are many different types of private loans, each program with its own rules and requirements. Private loans are also called private-label or alternative loans, and are often provided by the same lenders that also provide federal FFEL loans. Because the government does not subsidize private student loans, the rates and terms are not regulated the way they are for federal loans, which makes private loans more risky and expensive.
Private loan terms and conditions, including interest rates and fees, are generally based on your credit history or a co-signer’s credit history. This means that low-income students or those with negative credit histories will likely receive more expensive loans. Like government loans, private loans are supposed to be used only to finance postsecondary education (including books, transportation, and room and board). Check your school’s estimated cost of attendance and consult with the financial aid office before deciding on a private loan amount.
Private lenders may pressure or even require you to get a co-signer. A co-signer is a relative, friend or someone else who agrees to be responsible for your debt. Co-signers must understand that they are responsible for paying back the debt just as if they had received the money.
There are very important differences between government loans and private loans. If you take out a private loan, you will not be eligible for the same types of discharge, deferment and forbearance options that are available for federal loans. However, some private lenders are now offering limited discharge options for private loan borrowers. Sallie Mae, for example, has announced a disability discharge for Smart Option Student Loans; unfortunately that’s about the only reasonable repayment option that company offers (Well, They will also forgive any unpaid balance if a primary borrower dies but that’s definitely not a good strategy for getting rid of your student loans). Some private student lenders also offer deferments and forbearances, but these vary by program. Read your loan contract very carefully to learn about your private loan’s particular terms, conditions, benefits, rates, fees, and penalties. Private lenders do have to honor any promises they make about terms and benefits.

Working on Student Loan Debt

These loans are just like any type of debt. Your best bet is to pay them off incrementally as much as possible. If you have federal loans then you have a lot of different repayment options. If your income is not sufficient to pay the loans you can apply for a low-income payment plant (this generally requires that you work full time). You can also put these loans on forbearance for up to a year. Forbearance is generally not recommended because the interest will accrue and add to your principle balance but sometimes it’s the only option. The down side of federal loans is that if you don’t pay, the federal government has a bastion of collection tools to use against you. They can garnish wages (15% of your disposable income) and take your tax refunds.
Private loans are not nearly as forgiving as federal loans. Luckily they have fewer collection options than the government. Generally private lenders have tight restrictions on how many months you can be in forbearance and how many times you can go into forbearance (you also generally can’t do it twice in a row). The repayment options also aren’t nearly as flexible. Sallie Mae, for instance, offers an interest-only payment option and that’s pretty much it. Snowball payments may not be very effective for getting rid of student loans because loan companies make it very difficult to pay for just one loan when you have multiple loans. A better solution is a modified version of snowflake payments, I guess you could call them “baseball-sized hail” payments. You might find that your payments are somewhere in the neighborhood of $800 a month. If you obviously cannot afford this and the loan officers will not work with you, pay what you can afford every month to show that you’re trying to settle your debt. Giving something is better than giving nothing and showing that you’re willing to repay could be your ticket to filing post 7 bankruptcy or post 13 bankruptcy. For more information on filing bankruptcy, refer to the Bankruptcy Facts chapter.