Private Student Loan Forgiveness
If your private loans are large with a high interest rate they can seem nothing less than monumental! In circumstances like this even some relief on your federal loans (if you have those too) or circumstances like this even without federal loans, you can find yourself in a position to not be able to make even minimum payments. This can especially be the case if your lender won't work with you on realistic payment options.
Although, getting a private student loan company to forgive or settle with you as an individual can be time consuming and hard to do, there are companies that specialize in this service. They can usually get you a negotiated payoff for about 50% to 60% of what you owe, including their fee. They are able to get better settlement offers because they use the power of leverage to your advantage. By settling in a bulk fashion they are able to get lower settlements.
The debt settlement company will also provide an income and expenditure sheet to your lender to show them that you are financially incapable of paying your private student loan at it's current balance and payment. They will then have your monthly payments going into a segregated debt settlement account that is similar to an escrow/savings account. Once this account has the funds needed to pay the lender the settled amount, the funds will be wire transferred from the settlement company to the lender. This in the way it works not only with private student loan settlements but also with credit card settlement and business debt settlement.
The main thing to keep in mind when considering a company that provides private student loan forgiveness is to make sure and go with a reputable company who is easy to deal with since you will be dealing with them during the duration of the negotiated settlement process.
How much will private student loan forgiveness save me?
The amount you save will vary based on the amount of your loan, your financial status, your current interest rate, and the company's leverage you choose. Although there is no exact amount that can be stated, it will usually be quite a bit less than what you would pay back based on minimum payments. A pretty safe estimate would be approximately 50%-60% of what you would pay back.
What risks are involved with private student loan forgiveness?
There are some ways you may gain a little relief from private student loans. Most with a catch, though
It is possible that you could get relief from private student loans because of making a certain income or less. According to a report by US News & World Report if you make less than $70,000 as a single individual or less than $145,000 as a couple. Another factor is how much of the loan you used for education purposes. The more of the private student loan you spent on education, the more deduction you would get on your taxes. Also, only a portion of the interest (up to $2,500) is tax deductible. Not the greatest deduction considering you can pay more interest than that pretty easily in a year especially since interest rates on private student loans can rise since most of them have floating interest rates. Some private loan interest rates have been known to double or even triple over the course of the loan.
Set your private loans on auto-draft
This may or may not get you a lower interest rate, but it may be worth asking your lender. More than likely this won't amount to a big interest savings on interest, maybe .25%. One thing you will want to consider before setting up an auto-draft is making sure you will always have enough in your account to cover the payment. You don't want to save a little on interest to pay even more in insufficient fund charges to your bank.
Take advantage of forbearance for short term help
Sallie Mae is one lender that offer a forbearance option. On the surface this can seem like a good option at the time. No payments at all for three months and you can use as much as twelve months of forbearance altogether (in the case of Sallie Mae). It very well may be a good option in the end too but that will mainly depend on how much your finances improve during that forbearance period. The catch here is that you will end up paying more in the long run because the interest will still incur during the forbearance period. This can be a pretty large increase on the total payoff of the loan especially if it's used early on when the loan is larger and the amount of interest monthly is more.
One good rule of thumb is to not be too overly optimistic about how much your finances will improve during the forbearance period. This could potentially save you a lot more later then you will save now. One of the best methods is to pick up some part time work in your off time to use strictly for the purpose of paying down your private student loans. This may not sound like the most appealing option, but it can be an effective option to stay on top of them or even get ahead of them until you start making more money at your main job or get a better paying job.
Refinance or consolidate your private student loans
There is no guarantee that you will get approved to refinance or consolidate your private student loans. Much of the approval from the bank or institution you are applying with will be based on your employment status, income, credit score, and whether or not you have a co-signer with equally good or better credit score, income, and employment status. The second thing to know is that the whole goal here is not to just refinance or consolidate your private student loans, but to do so at a better interest rate that will hopefully not only save you on the total payoff but also monthly as well. This is not as much savings as you will gain through a forgiveness for your private student loans, but a good option for anyone who can afford their payments.
Use the debt snowball to lower your student loans
This can be an option that can save quite a bit on your overall payoff without any help or assistance from your lender or another financial institution. The Debt Snowball method, however, only applies to those who can afford their payments and ideally a little more. The method is simple and we give the steps below.
- 1) Pay a little extra toward your lowest balance student loan
- 2) Once you have paid off your lowest balance student loan, apply what you were paying on that student loan to your next lowest balance student loan
- 3) Once that student loan is paid off, apply what you were paying toward the two previous student loans to the next lowest balance student loan
- 4) Repeat these steps until all of your private student loans are paid off
Do you have both private and federal student loans?
Since there are a lot more repayment options available for federal student loans, you can take advantage of that and free up more cash to pay off your private student loans quicker. One repayment option that may accomplish this is an income based repayment option. This will assure that your federal loans are easily manageable based on your income, freeing up more money to be applied to your private loans.
By taking advantage of a lower repayment option for your federal loans you will not only free up cash flow to be applied to to your private loans, it will also give you the ability to use a debt snowball or debt avalanche. This idea is great if you can manage your private loans with a little relief on your federal ones. If they're still not manageable, you need to take more drastic steps to deal with them.