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Most borrowers of federal student loans received a helping hand from the government during the pandemic. Thanks to a law passed last year, as well as an executive order from President Biden, people with federal student loans can stop repaying them before October 1, without accruing interest on the balance.
But it won’t help Benny Kuo.
Kuo, Oregon Product Marketing Manager, one of approximately nine million student borrowers are not eligible for the no-penalty deferral provided to most federal student loan holders. This is because these loans are provided by individuals and not by the federal government.
“I was a little disappointed with how the government has moved in favor of borrowers of federal student loans, but not private ones. I didn’t quite understand why, ”says Kuo. “I really felt left out. All of these different constituents of the community received a hiatus during this time, while private borrowers of student loans did not. “
When Kuo graduated from the MBA program in 2017, he had about $ 50,000 in student loan debt. Seeking to lower the interest rate, Kuo refinanced his federal student loans into private student loans in August 2018 through a local credit union. The interest rate on its loans increased from 6.8% to 3.27% with a five-year repayment plan.
“I had a good job that was fairly stable, and I was confident that I could lose all the benefits of federal student loans due to the lower interest rate,” says Kuo.
Kuo, now 29, was able to maintain a steady income during the pandemic and plans to pay off his student loans by September this year, but he admits this is unusual.
“I am very lucky to be still working during the pandemic. I understand that I am one of the lucky ones, ”he says.
Data from the Center for Advocacy for Student Borrowers, a non-profit organization, shows that high-income students are more likely to get student loans from private lenders, and that they can usually pay them back over time. The report indicates that while students from low-income families and students of color are less likely to borrow, those who take out private student loans often have difficulty repaying.
How Private Student Loan Borrowers Left Behind
Not all student loans are the same. Borrowers of private student loans do not have access to the same protections that borrowers on federal student loans have, from cutting or stopping payments to being able to get help with repayment.
“I believe the government is saying that people who went through the federal program did the right thing and got a hiatus, but private student loan borrowers who may have had the misfortune don’t get it,” Kuo sums up.
The pandemic has made this reality clear, and the student loan provision in the CARES Act is the most obvious example. After several extensionsFederal borrowers are not required to make a lump sum payment on their student debt until October 2021. Private student loan borrowers, meanwhile, had few opportunities to seek help and remained largely at the mercy of their lenders.
“Many of them offered some kind of relief, but none of them were very generous. Most private student loan companies offered a three-month or six-month grace period, or let you skip two months of interest-free repayment, ”it said. Robert Farrington, CEO of College Investor, a website offering advice to student borrowers. “But none of this compares to what we’ve seen with federal student loans.”
Even before the pandemic, private student loan borrowers had fewer opportunities to get help. Private borrowers account for about 8% of total student loan debt, but according to the agency, they account for almost 30% of complaints received by the Consumer Financial Protection Bureau. Data for 2020…
The market for private student loans with $ 130 billion in outstanding debt continues to grow but remains largely unregulated, so the terms of private student loans can vary significantly from lender to lender. Just like car loans and credit cards, private student loan lenders can set their own repayment terms and requirements for participants. This can confuse borrowers, forcing them to pay more if they don’t understand exactly what they are signing up for.
And when it comes to repayment assistance, the industry can set its own terms as well.
“There is no general policy. You can designate five different student loan borrowers and they will all say they have five different aids if they get anything, ”says Farrington. “This is the best way to describe the confusion.”
What Can Private Student Loan Borrowers Do
Although the federal government does not help those who provide private student loans, borrowers still have options. If you have private student loans, here are some tips to help you pay off your loans and get out of debt.
Start a dialogue with your lender
Experts say that the most important thing right now is to contact your lender, if not to discuss repayment options, then at least stay on good terms if you miss a payment. The worst thing you can do is ignore your student loan payments.
“Private student lenders are much more aggressive in their collection tactics,” says Farrington. “Private student loan lenders may sue you, strip you of your paycheck, or even take over your home depending on your state. If you need help and haven’t reached out to your lender yet, this should be your first call. “
Your private lender may offer you flexible repayment options, so it’s always worth asking if you’re in trouble, says Farrington. If you don’t know how to ask or where to start, you can use these tools and sample letters from the Consumer Financial Protection Bureau as a guide.
There is also respite or abstinence, but these options should be your last resort. When you enter into a deferral or deferral with a private lender, loan payments are temporarily suspended, but interest is still charged.
“If you’re unemployed or facing other financial hardships, delay and abstinence are much better options than defaulting on your private loans,” says Farrington.
Make a repayment strategy
How to Get Rid of Student Loan Debt requires strategic planning… First things first: sort out your balance and interest rate, then create a payment plan.
To do this, you need to revise your budget. Go point by point and see if there are expenses that you can cut back and redirect to loan payments. Any extra money you can free up can go directly to reduce your balance. Carpenter says the best way to cut down on your student loan balance is to make additional payments in excess of the minimum amount. This is what Kuo did. He calculated how much his interest was charged, and paid in addition to the principal amount of the debt every month.
“One positive side of all this is that it made all student loan borrowers take a close and careful look at their personal situations,” says Matt Carpenter, CEO of College Funding Services, a student loan company based in Massachusetts.
After you’ve used up your budget, consider two of the most popular repayment strategies: debt snowball and debt avalanche. If you choose the snowball method, you will make the minimum payments on all debts, except for the account with the lowest balance. Using the debt avalanche method, you will first focus on the account with the highest Annual interest rate or annual interest rate…
Pay attention to your student loan repayment schedule, which determines how much of the payments goes to interest and how much goes to the main balance. If possible, try to allocate more of your payments to your main balance to pay off faster.
“If you have both federal and private loans, this is a great time to channel any additional funds from your budget towards these private loans and try to knock them out, or at least reduce them as much as possible, since there is no need to make any- or federal loan payments, ”says Farrington.
Lower your interest rate through refinancing
Refinancing of private loans could be a way to drastically cut your monthly payments thanks to the low interest rates right now. If you have high interest private loans, refinancing can lower your current interest rate by a few percentage points and save you money over time. Unlike federal borrowers, private borrowers do not lose their refinancing protection.
“At current rates, you want to shop to potentially refinance,” says Carpenter.
But refinancing only makes sense if you can check certain boxes. To get the best loan rates and conditions, you will need a relatively high credit rating, good credit history, and a salary that can withstand repayments. You will also want to make sure that you can save a significant amount on your loan payments through refinancing, otherwise it makes no sense.
Although there are no clear rules as to what constitutes good credit rating, you’ll want to be in the 600 to 700 range to get an attractive rate.
If you can do that, then refinancing can be a very good option, and it can give you peace of mind as well.
Kuo has no regrets about refinancing his federal loans into private loans, although payments on the first have been suspended.
“I felt comfortable taking the risk knowing that I had a higher interest rate and I was cutting a significant portion of my time on student loans,” he says. “It’s much better for my financial and mental health goals.”