Private Student Loans: Consolidation and Relief

Current data suggests that there is $99.7 Billion in outstanding private student loans.  With 90% of private student loans having a co-signer, these student loans can pose a serious and stressful problem for entire families!  With 7.2% of private student loans under stress (delinquency, default, or forbearance), that’s $7 Billion in problematic private student loan debt.

What can I do to Reduce My Private Student Loan Burden?

Based your specific situation, you may be able to:

1. Attempt to reduce your payment through re-financing or consolidating your private student loans at a lower interest rate or longer pay off term
2. Attempt to reduce or dismiss your principal balance through a more traditional debt settlement program where you or a debt settlement firm attempts to negotiate with your lender
3. As a temporary fix to your private student loans, attempt to pause your loans by asking your lender for a forbearance or deferment

Unfortunately, unlike Federal student loan income driven and forgiveness programs which are guaranteed for those who qualify.

How do I Re-Finance or Consolidate My Private Student Loans?

This is a great option for credit worth borrowers.  Re-financing/consolidation is done through private lenders (see our page here for names of some private student loan lenders).

A lender will generally look for 3 things when considering whether you can re-finance:

• Credit Score:  Generally you need a score higher than 660
• Debt to Income Ratio: Generally your debt to income can’t exceed 40-45%
• Steady income

How can I Negotiate with my Lender?

You can either attempt to do this yourself, or you can hire a debt settlement firm that specializes in settling debts.  Most people find it very intimidating to negotiate with a lender and thus hire a private firm if this is the route they choose.  Firms that specialize in this also have many tricks in how they deal with lenders that makes them more likely to negotiate.

How Does Debt Settlement Work?

In order to get a lender to actually negotiate reduced payments and/or a reduced principal balance, typically the borrower has convinced the lender of two things:

1. That the borrower cannot afford to fully pay the private student loan (and thus won’t)
2. That they will get something if they negotiate with the borrower (often this is a lump sum payment of some amount) and be better off than they were prior to negotiating

There are many different approaches to settle student loans and results are IN NO WAY guaranteed. Debt settlement companies help borrowers understand what lenders typically require to settle and often use the leverage of having many clients who want to settle and then settle in bulk to get the best deal for their clients.  Generally, there are two ways that settlement companies settle private student loans

1. Allow time for the client to build up a lump sum, then approach the creditor and attempt to settle
2. Find a lender that is willing to re-finance a lower amount of debt and approach the lender to settle for that amount

In both cases the lender sees that the borrower can pay a large chunk of the debt up front and thus is more willing to take an offer of settlement.

How Much Can I Save?

This varies tremendously, some borrowers are unable to settle, but many settle for significantly less than the original loan.

What are the Issues and Risks:

• Debt settlement will result in a lower credit score
• While attempting to settle collectors will call (sometimes VERY often)
• Depending on the borrowers circumstances, they may owe taxes on the canceled debt (make sure to discuss the tax implications with a professional before choosing debt settlement)

How much does it cost?

Debt settlement companies typically charge a percent of the value of the debt being settled.

What to watch out for In a Private Student Loan Settlement Company:

• Beware of anyone who guarantees an outcome–This is NOT legal
• Beware of anyone who does not warn you that settling debts can harm your credit
• Beware of anyone that doesn’t warn you that attempting to settle your private student loans may cause you to receive collections calls

An Alternative Approach to Debt Settlement: Dismissal

Debt dismissal is very new approach, there are a very few law firms attempting to get private student loan debt fully dismissed by claiming the loan was taken out based on fraudulent claims made by unethical for-profit colleges working in collusion with lenders.  The efficacy of this method of student loan forgiveness is still unclear, but we will continue to monitor it and update as more cases are tried.

What About Pausing my Private Student Loans (a Temporary Fix)?

The ability to pause your loans via a forbearance or deferment depends entirely on your specific loan docs and lender.  Currently, 2.2% of private student loans are in forbearance.  It is definitely worth a call to your lender to see if they will allow this if you are struggling through a temporary hardship.  But a word of caution–make sure you understand what your lender is offering as interest is likely to continue piling if you are not making your payments.

What Else Can I Do?

Because many borrowers who struggle with private student loans also have federal student loans, often the best first step of any strategy to improving your student loan situation is to consolidate your federal student loans to take advantage of the Income-Driven Repayment Plans available.  You can do this through the Department of Education or your loan servicer yourself, or you can pay a private document preparation company to help you better understand your options and help you enroll in the program that is most beneficial to you.  We specialize in helping borrowers take advantage of income-driven programs and would love to help you assess and improve your situation.