Student loan cancellation has dominated much of the college debt conversation over the past year, sparked by President Biden’s campaign pledge to write off $ 10,000 in student loan debt for every federal borrower.
This type of widespread student loan forgiveness seems less likely now that Biden is in power. But even if the legislation is passed, it will only benefit borrowers with federal debt. Borrowers with private student loans – loans from banks, credit unions, and online lenders – would still be required to make their payments.
Will the student loan forgiveness include private loans?
Unfortunately, the chances of student loan cancellation extending to private loans are slim. For one thing, all current loan forgiveness programs, such as public service loan forgiveness, income-tested repayment plans, and teacher loan forgiveness, are limited to federal student loans. Even the military student loan repayment assistance program is limited to federal loans.
Student loan expert Mark Kantrowitz points out that while there was an earlier legislative proposal that included private student loans alongside federal loans (The Heroes Act of 2020, HR 6800, which was passed by the House but was blocked by the Senate) ‚it was much more complicated and could not be implemented automatically.
Biden’s campaign platform and subsequent pressure from Congressional Democrats like Elizabeth Warren focused entirely on federal student loan debt. Because private student loans are managed by private companies, they are exempt from the proposals currently in place.
3 strategies for repaying private student loans
Even if the cancellation of federal student loans does eventually happen, you are still responsible for paying off your private student loans. Here’s how to approach them.
Strategy 1: Suspend payments on federal loans, accelerate them on private loans
If you’re having trouble paying off your student loans, you can take a break from your federal student loans. In one of his first official acts as president, Biden extended the payment and interest hiatus on federal student loans, and it has since been extended until Jan.31, 2022.
This means you can stop paying your federal student loans without penalty or interest until February 2022, although you want to continue paying them off if you can.
If you have both federal and private loans, it may be a good idea to stop paying federal loans and speed up your private loan payments, says Kantrowitz. Since private loans generally carry higher interest rates than federal loans, this strategy will reduce your interest charge over time. In addition, private loans usually have less generous terms on forgiveness, so you should prioritize paying back the money you owe to private lenders.
Strategy 2: refinance your private student loans
Refinancing allows you to pay off your old debt and turn the balance into a new loan, ideally with a lower interest rate. However, you will need pristine credit to qualify for an extremely low rate. Private loan rates can go up to 13%.
For now, focus on refinancing your private loans, not your federal loans. If you refinance federal loans, you will again be immediately responsible for payments and lose the ability to apply for existing student loan exemption plans.
Strategy 3: Request abstention
If all else fails and you can’t make your payments, try calling your private lender and asking for forbearance, which is a break on payments.
“If for some reason you are not eligible with a refinance provider and want to suspend your payments with your existing lender, you should call them and request a forbearance plan,” says Steve Muszynski , founder and CEO of Splash. Financial, a student loan refinancing marketplace. “While it’s likely that interest will continue to accumulate, you may be able to take a break from your payments. “
Your options in this regard largely depend on the lender, as each has their own plans and hardship options in place. It doesn’t hurt to reach out and see if your lender is open to forbearance.
Private student loan forgiveness options
Private student loan exemption programs are rare. Canceling your private loan is rare, but there are a few options to help you save money on your private student loans:
- Student loan repayment assistance program paid by the employer. You can ask your workplace if they have an employer-paid student loan repayment assistance program, or PARL. “These RRAPs allow employers to provide up to $ 5,250 per year in student loan repayment assistance to the borrower,” says Kantrowitz.
- State reimbursement assistance program. Some states offer student loan repayment assistance to residents of certain counties or to workers in certain occupations. These programs could write off tens of thousands of dollars in private student loan debt, as long as you’re ready to move.
- Education savings plan 529 remaining. Under the SECURE Act of 2019, money left in a 529 education savings plan can repay up to $ 10,000 in qualified student loans per borrower. This can go to a beneficiary or a brother or sister of a beneficiary.
- Student loan interest tax deduction. The student loan interest deduction allows you to deduct up to $ 2,500 in interest paid on federal and private student loans. This could help you get some money back on your tax return, which you can then use for your private student loans.