A private student loan is a loan that is made by an individual financial institution rather than by the federal government. A government loan may also be known as a public loan.
A student attending school who cannot pay for their entire tuition costs with a public loan may take out a private loan to cover the gap. Compared to federal government loans, private student loans typically have:
- Higher interest rates;
- Stricter payback regulations;
- Fewer deferment options; and
- Quicker default guidelines.
If an individual is having trouble making student loan payments, options may include:
- Loan cancellation;
- Postponing payments through forbearance or deferment; or
- Filing bankruptcy and discharging the loan.
If student loan payments are not made in full for a period of time, the balance can go into default. A private student loan default may create serious financial problems for the borrower.
If a lender or a collection agency that is hired by the lender seeks and receives a judgment against the borrower, the lender has many financial remedies which are available to them. The assets and the bank accounts of the borrower may be frozen and their wages can also be garnished when the lender is attempting to recoup their lost funds.
What is Loan Cancellation?
Loan cancelation may cancel all or part of an individual’s loan for certain reasons, including:
- Teaching needy individuals, including disabled and low income populations;
- Joining the military or other uniformed service;
- Performing community service;
- The university they attended closes down;
- The university was falsely certified; or
- As a refund for a school the individual applied for but never attended.
Loan cancellation means the loans are wiped, no payments are required in the future, and any prior payments are reimbursed. It is important to note that a student loan is essentially a contract and if the school is unable to uphold their end of the contract, they should not be paid for services not rendered.
What is a Forbearance?
Forbearance is a postponement of payments where the loan holder, the bank or agency which granted the original loan, permits the borrower to stop making payments for a period of time. A forbearance only apples to the principal that is owed, so interest continues to accrue. A forbearance is easier to get than a deferment, but is less helpful because the total balance due will continue to increase because of the accruing interest.
What is Deferment?
Deferment is the postponement of loan payments which are based on certain conditions being met for a certain period of time. For example, an individual may be able to obtain a deferment for being unemployed or for going back to school.
The length of extra time a deferment gives an individual will depend on the loan. In some cases, deferments postpone payments of both the principal due as well as the interest. It is not possible to receive a deferment if an individual has defaulted on the loan.
What are the Options for Bankruptcy?
There are two main types of bankruptcy available to individuals. A Chapter 7 bankruptcy, or a liquidation bankruptcy, allows an individual to discharge some debts but requires the individual to surrender assets to repay their debts.
The second main type of bankruptcy is a Chapter 13 bankruptcy, or reorganization bankruptcy. In this type of bankruptcy, an individual is able to retain their assets but are required to submit to a payment plan, which often lasts around five years.
It is important to note that it is extremely difficult to discharge a student loan through bankruptcy. The only way to do so would be to convince the court that repaying the loan would create a severe hardship.
What Defenses are Available for Borrowers?
In most cases, student loan debts are not dischargeable through bankruptcy proceedings. This applies to both public and private student loans. Student loans are specifically exempted from Chapter 13 bankruptcy proceedings.
In the past, a student loan could be discharged if a certain amount of time had passed. However, this has been amended so that student loan debts are the borrower’s responsibility for life or until the student loan is paid off.
The only possible defense to the problem of private student loan debt is undue hardship. Undue hardship is when a debtor claims that it would be too difficult to repay their student loans due to physical or other limitations which prevent them from earning enough money to repay the loan.
A severe hardship consists of several factors, including:
- Paying off the loans would result in a failure to maintain a minimal standard of living;
- Circumstances dictate that this low standard of living would persist for the foreseeable future; and
- The individual made a good faith effort to repay the loans.
Although it would seem simple to fulfill these factors. However, the legal meanings of these ambiguous phrases often prevent debtors from pursuing a discharge through bankruptcy.
A minimal standard of living means living below the poverty in the state in which the individual resides. These standards will differ from state to state.
The circumstances which require a debtor to live at this standard for the foreseeable future must be outside the normal hardships that most individuals experience. For example, unemployment is not a circumstance which would satisfy this requirement. However, an inhibiting medical condition may be deemed an acceptable circumstance to satisfy the requirement.
Lastly, the debtor must be perceived as a responsible person who is overwhelmed by mounting debt. This requirement is intended to prevent individuals from abusing the bankruptcy system in order to avoid paying debts that they legally owe.
This defense is not typically successful. The court reviews the individual’s overall financial circumstances.
The court does not typically find in favor of a debtor and typically rules that the debtor is capable of repaying their student loans. In some cases, a partial discharge is granted. However, the debtor is still required to pay back the remainder of the private student loan to the lender or collection agency that acquired the debt during default.
What are the Consequences of Defaulting on a Private Student Loan?
There may be several consequences of defaulting on a private student loan. First, the entire balance of the student loan and any interest owed becomes immediately due, called acceleration.
Additionally, an individual is no longer able to receive a deferment or forbearance. The individual also loses eligibility for other benefits, including the ability to choose a repayment plan.
It is important to note that a private student loan lender is not required by law to offer any get out of default programs. In addition, many private lenders charge off loans after 120 days of missed payments.
After the loan is in default, most private student loans lenders will not work with the borrower to get out of default. If a lender has trouble obtaining payments on a private student loan, they may sue the borrower.
How Has COVID-19 Affected Private Student Loan Defaults?
COVID-19 has affected nearly all aspects of life around the world, including student loans. Private student loans are not eligible for the COVID-19 relief provided for federal student loans.
Each private loan holder will have to check with their lender to determine if any relief measures are in place during the pandemic. In addition to the private lenders, some states have implemented relief efforts in collaboration with private student loan lenders.
Since these programs vary so widely by lender and by state, an individual should contact their lender to determine what assistance may be available. For more in depth information, an individual should contact an attorney for assistance.
Do I Need a Lawyer for Help with Private Student Loan Default Issues?
Yes, it is essential to have the assistance of a bankruptcy lawyer if you are facing student loan default issues, are considering bankruptcy, or have already filed for bankruptcy. Your lawyer can review your situation, advise you if any defenses are available, and assist you throughout the bankruptcy process.