Private Student Loan Forgiveness Options
Introduction
The likelihood of receiving private student loan forgiveness is low, with very few exceptions. While it may be impossible to completely eliminate your debt, there are steps you can take, such as applying for repayment aid or refinancing, to make your situation better.
It can be difficult to qualify for other forms of credit or to make your monthly payments when your student loan balance is high. This may be particularly the case for those who have taken out private student loans and do not qualify for income-based repayment programs. Private student loans total $128 billion, or 7.3% of the total $1.76 trillion market. Borrowers are responsible for paying these loans back.
Forgiveness of private student loans does not come easily. Nonetheless, there are options available to you to either reduce the severity of your payments or apply for state-sponsored payment aid programs.
Is Forgiveness an Option for Private Student Loans?
Forgiveness of private student loans is uncommon. The only typical circumstances for this to occur are the borrower’s death or a chronic disability.
Loan forgiveness is not an option for those with private student loans, even if they work for the government and pay them off over a set period of time. These choices are exclusively available to borrowers of federal student loans.
No matter what the Supreme Court decides, the loan forgiveness program that President Joe Biden unveiled in August 2022 will not apply to private student loan borrowers either.
“The student loan forgiveness options proposed by the Biden administration only affect federal student loans, not private educational debt,” argues Jay Fleischman, a student loan attorney.
Reason being, federal loans are owned by the United States government. Banks and credit unions are examples of lenders that provide funding for private loans.
“Lenders and holders of private student loans may establish policies for forgiveness, discharge and cancellation but aren’t required by law to do so,” according to Fleischman.
Loan Forgiveness by Private Lenders for Students
If you have private student loans, your lender and the terms of your loan will determine your choices for repayment assistance. You can get a copy of the agreement by contacting your lender or looking it up on their website. A few private lenders that offer student loans have the following policies:
Very serious. When a student dies or becomes completely and permanently incapacitated, the lender takes care of paying off the loan.
Easy navigation. Students who incur private student loan debt may be exempt from repayment in the event of incapacity, death, or “certain other circumstances.”
The name is Sallie Mae. If the borrower passes away or becomes fully handicapped, the lender will forgive the current balance.
SoFi. If the main borrower passes away while attending school or while repaying the loan, the remaining debt will be forgiven. The student remains liable for the loan’s repayment in the event of the co-signer’s demise.
Steps to Take for Requesting Partial Discharge of Private Student Loans
Here are some choices to consider if you are having trouble paying back your private education loans.
Contact your lender. You should talk to your lender about your financial problems before you let your student loans go into default. A low credit score is a direct result of late or missed payments, which can lead to legal action by the lender to collect the outstanding amount. Provide your lender with up-to-date financial documents, such as pay stubs or bank statements, to demonstrate that you can afford the monthly payment. Lenders often provide payment reductions, payment waivers, or interest-only plans as a temporary solution.
Put forbearance or deferral on the table. You can temporarily lower or delay your payments with both options. The main distinction between the two is that, in most situations, interest does not accrue on your loan balance while you are in forbearance, but it does when you are in deferment. These choices may be offered by private lenders depending on their own preferences. Student loan lawyer Adam S. Minsky of Boston argues, “These are not long-term solutions and may result in higher monthly payments when the temporary relief ends.”
Consider refinancing. You should weigh the benefits and drawbacks of this option carefully before moving forward with the process of getting a new private loan to settle your outstanding balance. You might want to think about refinancing if you want to cut your monthly payments or lock in a better interest rate. But, “The best refinancing products are limited to borrowers with high income and excellent credit,” explains Minsky. If you choose this option, think about getting a co-signer who is someone you know and trust to help you out financially.
Request help with paying back your loan. Help with paying back loans is available through programs run by your state government. The programs often provide funds to be applied against federal or private loans rather than debt discharge. With respect to each program, “Eligibility criteria and the amount of relief may vary significantly,” Minsky states. Find out who to talk to about student loans in your state by visiting the website of the department of education or getting in touch with the ombudsman for your state. “Read the requirements carefully to ensure you aren’t compromising your qualification for federal programs,” Fleischman advises while researching programs. “Revisit program requirements on a regular basis to make sure you remain on track.”
Help with settling student loan debt. Your best bet if you’re in default on your student loans is to contact your lender and see if you can work out a reduced payment plan. Get everything in writing and make sure to request a receipt once you pay if your lender gives their OK. If the credit bureaus record your account as “settled,” it can have a negative impact on your score.
Are private student loan debts cancellable in bankruptcy?
Bankruptcy may eliminate part or all of your student loan debt, whether it’s private or federal. Your credit score may take a hit in a bankruptcy, but at least you can start over.
According to Stanley Tate, a student loan attorney, “filing for bankruptcy lets you drop a nuclear bomb on most of your debts” instead of “struggle struggling to pay down debts via the snowball or avalanche methods” which can take years. “Filing bankruptcy may also be the smartest move to tackle your private student loan debt if you can’t afford the payments, can’t refinance and can’t afford a settlement.”
Choosing between Chapter 7 and Chapter 13 bankruptcy is an important first step if you’re considering this option. If you meet the requirements set out by the means test, you may be able to have most of your unsecured debts, including student loans, discharged through Chapter 7. You might consider filing for Chapter 13 if you are able to maintain a steady income and would like to retain assets like a house or car.
The next step is to show the bankruptcy court that continuing repayment would put you through an unreasonable amount of hardship. Filing for bankruptcy and an adversary action, a distinct litigation, are both necessary steps in the procedure to discharge qualifying student loans, which can add complexity to the process. Hiring an attorney to represent you is highly encouraged by the American judicial system.
Although there is no official list of required documents for a student loan case, Tate advises his clients to have the following on hand:
The most recent five years’ worth of tax returns and W-2 forms.
Two years’ worth of pay stubs and bank records.
Household bills, résumé and Social Security earnings record from the last 12 months.
In conclusion, exploring private student loan forgiveness options can offer relief and assistance to borrowers burdened by their educational debt. While private loan forgiveness programs may not be as widely available or structured as federal forgiveness programs, avenues such as refinancing, income-driven repayment plans, and loan discharge due to disability or death can provide some degree of assistance. Additionally, borrowers should diligently research and negotiate with their lenders, seek guidance from financial advisors, and explore alternative repayment strategies to manage their debt effectively. Ultimately, while private student loan forgiveness may present challenges, proactive measures and informed decisions can pave the way toward financial stability and debt relief.
Common Questions About Private Student Loan Forgiveness
What Happens to My Taxes on Forgiven Student Loans?
Federal income taxes may be exempt from payment if your student loans have been discharged, canceled, or forgiven within a specific time period. The provision that prevents the IRS from collecting income tax on cancelled student loan debt from January 1, 2021, through December 31, 2025, is part of the American Rescue Plan of 2021, which aims at COVID-19 recovery. But paid off, settled, or cancelled student loans may be subject to taxes in certain states.
How Are Loan Forgiveness, Cancellation, and Discharge Differed?
If your loan has been forgiven, cancelled, or discharged, you will no longer be obligated to repay the amount in whole or in part. The United States Department of Education states that these words have comparable but somewhat different connotations when discussing student loans. The borrower’s employment status may necessitate the cancellation or forgiveness of a debt. A borrower is eligible for a discharge of their student loans when they are no longer obligated to make payments due to extenuating circumstances, such as the closing of their institution or a total and permanent disability.