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Understanding Private Student Loans

Private student loans are issued by private organizations, such as banks, credit unions, and online lenders. While they can be helpful for financing your education, private student loans are typically less favorable than federal student loans, and they have fewer options for loan forgiveness.

What’s the Difference Between Federal and Private Student Loans?

Unlike federal student loans, in which terms and conditions are set by the law, private loans adhere to conditions set by the lender. Ultimately, private loans tend to be much more expensive than federal loans. Although federal student loans don’t require payments while you’re in school, some private lenders require payments while you are still in school. Similarly, interest rates are often higher for private student loans, and the rates can be variable, meaning they change with very little warning. Additionally, some federal loans are subsidized, which means the government pays the interest while you are in school, but private loans are rarely subsidized, and you are responsible for all of the interest for the lifetime of your loan.

You may also need a good credit score or a co-signer to get a private student loan, but federal student loans (excepting PLUS loans) are not credit-based. When it comes to repayment, federal student loans are often more flexible, as well. You can consolidate your federal loans, temporarily postpone or lower payments, and tie your repayment plan into your monthly income, whereas you must check with your lender first for private student loans.

Overall, federal student loans are much more regulated and consistent than private student loans. Private lenders are subject to fewer regulations and have more control over your loan, and the government has an entire system to help you finance your education.

Why Do Students Take Out Private Loans?

If private student loans are so much less favorable than federal student loans, you may be wondering why people take out private loans, in the first place? Well, federal loans max out at $12,500 annually and $57,600 total, so many students use private student loans to finance the gap between federal loans and the cost of higher education.

Private student loans can also be helpful for summer terms, when less financial aid is available, or for special experiences, like studying abroad.

Relief for Private Student Loans

While federal loans have forgiveness programs, NerdWallet explains that “there’s no such thing as private student loan forgiveness.” Further, federal relief programs – like the payment pause during the COVID-19 pandemic – only apply to federal loans.

For many people, refinancing, deferment, and forbearance are the only options when private student loans become too hard to pay. Nevertheless, there is one other way out for both private and federal student loans – bankruptcy and adversary proceedings.

If you file a Chapter 7 or Chapter 13 and demonstrate that repayment would impose “undue hardship” on you and your dependents, you may be able to have your student debt dismissed during an adversary proceeding.

This is another lawsuit within your bankruptcy, and you must prove:

  • Repaying the loan would not allow you to maintain a minimal standard of living.
  • This hardship will continue throughout a significant portion of your loan repayment period.
  • You made good faith efforts to pay your loan before filing for bankruptcy.

During your adversary proceeding, your lender may also challenge your request, and your loan may not be fully discharged. Getting rid of student debt is notoriously difficult, and private lenders can complicate the matter.

Still, discharging private student loans is not impossible. If you need help moving forward from crippling student debt, our student loan attorney can help. At Joseph J. Mancuso, P.A., we have been helping clients recover from seemingly hopeless financial situations for more than 25 years – and we can do the same for you.

Our firm offers affordable debt relief services, and we treat everyone we work with like family.

Call us at (407) 378-5488 or contact us online for a consultation – we are available 24/7 and offer FREE virtual consultations during the COVID-19 crisis.