When you have a large student loan balance, you may struggle to keep up with monthly payments or to qualify for other types of credit. This can be especially true for private student loan borrowers who don’t have access to income-based repayment plans. Borrowers collectively shoulder $128 billion in private student loans, which make up 7.3% of the $1.76 trillion student loan market.
There are no easy routes for private student loan forgiveness. However, you can take steps to make your payments more manageable or to receive payment assistance from your state.
[Read: Best Private Student Loans.]
Can Private Student Loans Be Forgiven?
Private student loans are rarely forgiven. Generally, it only happens if the borrower becomes permanently disabled or dies.
If you have a private student loan, you won’t receive forgiveness after working in a public service industry and paying down your balance over a certain number of years. Only federal student loan borrowers qualify for these options.
Private student loan borrowers also won’t qualify for the loan forgiveness plan announced by President Joe Biden in August 2022, regardless of whether the Supreme Court allows the plan to proceed.
“The student loan forgiveness options proposed by the Biden administration only affect federal student loans, not private educational debt,” says Jay Fleischman, a student loan attorney.
That’s because the U.S. government owns federal loans. Private loans, on the other hand, are funded by lenders such as banks and credit unions.
“Lenders and holders of private student loans may establish policies for forgiveness, discharge and cancellation but aren’t required by law to do so,” Fleischman says.
Private Student Loan Forgiveness by Lender
Your relief options for private student loans will depend on your lender and your loan agreement. Contact your lender and request a copy of the agreement or check your lender’s website for details. Here is a sampling of policies from some private student loan providers:
Earnest. The lender discharges the student loan balance if the borrower dies or becomes totally and permanently disabled.
Navient. Borrowers may no longer have to repay private student loan debt in cases of disability, death and “certain other circumstances.”
Sallie Mae. The lender waives the current balance if the borrower dies or becomes permanently and totally disabled.
SoFi. The loan balance is forgiven if the primary borrower dies while enrolled in school or during repayment. If the co-signer dies, the student is still responsible for paying the loan.
[Read: Best Student Loans Without a Co-Signer.]
What to Do if You Need Private Student Loan Forgiveness
If you’re struggling to make your private student loan payments, here are some options you can pursue.
Talk to your lender. Contact your lender and discuss your financial situation before defaulting on your student loan. Missed payments can damage your credit score, and if they pile up, you may be sued for the balance by the lender. Tell your lender how much you can afford to pay each month, and show proof with recent bank statements or pay stubs. The lender may agree to temporarily lower your payments, waive a payment or shift to interest-only payments.
Consider deferment or forbearance. Both allow you to temporarily postpone or reduce your payments. The key difference between the two is that interest accrues on your loan balance while you’re in forbearance but not deferment in most cases. Private lenders may offer these options at their discretion. “These are not long-term solutions and may result in higher monthly payments when the temporary relief ends,” says Adam S. Minsky, a student loan attorney based in Boston.
Look at refinancing. This step involves taking out a new private loan to pay off your original debt, a move with pros and cons to consider before proceeding. Reasons to refinance may include the ability to lock in a lower interest rate or extend your term to reduce your monthly payments. However, “The best refinancing products are limited to borrowers with high income and excellent credit,” Minsky says. If you go this route, consider asking a creditworthy friend or family member to co-sign the loan.
Apply for repayment assistance. Your state government may provide relief in the form of loan repayment assistance programs. Instead of discharging your debt, the programs usually offer money for you to use toward federal or private loans. For every program, “Eligibility criteria and the amount of relief may vary significantly,” Minsky says. Head to your state’s department of education website or contact your state’s student loan ombudsman to start your search. When investigating programs, “Read the requirements carefully to ensure you aren’t compromising your qualification for federal programs,” Fleischman says. “Revisit program requirements on a regular basis to make sure you remain on track.”
Negotiate student loan debt. If your student loan is in default, you may be able to negotiate with the lender to pay less than you owe in one lump sum. If your lender agrees, get the deal in writing and ask for a receipt after you pay. Your account may be reported to the credit bureaus as “settled,” which can hurt your credit score.
Can Bankruptcy Cancel Private Student Loan Debt?
Yes, you may be able to discharge some or all of your student loans in bankruptcy — whether the debt is federal or private. Bankruptcy can damage your credit score, but the major benefit is that you get a fresh start.
“Rather than struggling for years to pay down debts via the snowball or avalanche methods, bankruptcy lets you drop a nuclear bomb on most of your debts,” says Stanley Tate, a student loan attorney. “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.”
If you’re interested in this path, you must decide which type of bankruptcy to file: Chapter 7 or Chapter 13. Chapter 7 allows you to discharge most of your unsecured debts, including student loans, but you will need to pass a means test to qualify. Chapter 13 could make sense if you have a stable income and want a chance to keep assets such as a home or car.
You’ll then need to prove in bankruptcy court that you’d suffer undue hardship if forced to continue repayment. The process can be complicated because you’ll need to file a bankruptcy proceeding and an adversary proceeding, which is a separate lawsuit to discharge qualified student loans. The U.S. court system strongly recommends hiring a lawyer to walk you through the process.
The court system doesn’t list specific documents you have to present for a case involving student loans, but Tate asks his clients to prepare the following:
— Tax returns and W-2 forms from the last five years.
— Pay stubs and bank statements from the last two years.
— Household bills, resume and Social Security earnings record from the last 12 months.
[Read: Best Student Loan Consolidation and Refinance Companies.]
FAQs for Private Student Loan Forgiveness
Will I Pay Taxes on Any Forgiven Student Loan Debt?
If your student loans have been discharged, canceled or forgiven within a certain time frame, you might not owe federal income taxes. The American Rescue Plan of 2021, aimed at COVID-19 recovery, included a provision that prohibits the IRS from collecting income tax on canceled student loan debt from Jan. 1, 2021, through Dec. 31, 2025. However, some states may tax forgiven, settled or canceled student loans.
What’s the Difference Between Loan Forgiveness, Cancellation and Discharge?
Forgiveness, cancellation or discharge means you no longer have to repay some or all of your loan. These terms have similar meanings in the world of student loans but are used in slightly different ways, according to the U.S. Department of Education. A lender may forgive or cancel a loan because of the borrower’s job. Student loan discharge happens when a borrower is no longer required to make payments because of other circumstances, such as a total and permanent disability or school closure.
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Private Student Loan Forgiveness Options originally appeared on usnews.com
