Only 8% of the $1.3 trillion in outstanding student loan debt is owned by banks and financial firms. But those loans can give borrowers big headaches.
Private student loans don’t have the same benefits as federal loans, like multiple student loan repayment plans or loan forgiveness options if you work in public service. That has left some grads with large private loan bills and few options if they can’t manage the cost.
“The most pain for borrowers is just not being able to make these high monthly payments, and there being no flexibility, no different payment plans,” says Andrew Weber, an Athens, Ohio, certified student loan counselor who specializes in private loan management.
But there are ways to ease the burden. You can refinance with a new lender, strategically pay off your highest-interest loans first, or apply for loan modification. Here’s how to know which option to choose:
3 ways to tackle paying back private student loans
OPTION NO. 1: REFINANCE YOUR STUDENT LOANS
Who it’s best for: Borrowers with solid income and credit history, or who can use a co-signer
If you haven’t missed payments on your private loans but want to save money, you can refinance student loans with a new lender. The company will pay off your current loans and give you a new loan at a lower interest rate, if you meet requirements. You can also use a co-signer with great credit if you’re not sure you’d get a good rate on your own.
There’s less risk in refinancing private student loans than federal loans because you won’t lose federal repayment benefits; your loans are already privately owned. The most important criteria for refinancing include:
- Good credit. Lenders have different standards for deciding whether they’ll work with you. Most use your FICO score, and a score of 680 or higher is generally best. Others look at your financial and educational history as a whole. Ultimately, however, these lenders consider similar criteria to what your FICO score incorporates: whether you regularly pay bills on time and don’t carry a large credit card balance, for instance.
- Low debt in comparison to income. Lenders prefer that their customers’ total debt be less than their annual earnings, but the precise ratio they’re looking for varies. Some ask for your debt to be no more than 40% of your income, while others have stricter requirements.
- Proof of employment. Some lenders require you to have worked for at least two years before refinancing; others simply need an offer letter from your company to prove you’re employed. In general, refinancing makes the most sense for borrowers who work full time and who aren’t concerned about job stability.
If you get rejected by a refinancing lender, call and ask why. You may get insight into the reason — too much credit card debt, perhaps, or you haven’t been working for long enough — and you can reapply later.
OPTION NO. 2: PAY EXTRA TOWARD YOUR HIGH-INTEREST LOANS
Who it’s best for: Borrowers who don’t qualify for refinancing
If you’re not eligible for refinancing but you’re comfortable budgeting your money, focus on paying off one loan at a time until they’re gone.
Make a list of all the private loans you’re currently paying down, including their balances, interest rates and minimum monthly payments. Make a plan to pay more than the total minimum each month, and allocate that extra amount to the loan with the highest interest rate. That will ensure you save the most money on interest over time.
Try earning additional income, getting rid of recurring expenses you don’t use (like cable or gym memberships) or selling items you don’t need. You could also pay off your smallest loan initially, which might empower you to get rid of more loans. But you’ll free up more money in the long run if you focus on the loans that rack up tons of interest every month.
OPTION NO. 3: APPLY FOR LOAN MODIFICATION PROGRAMS
Who it’s best for: Borrowers who are behind on their student loan payments
Maybe it’s increasingly difficult for you to afford your private student loan bills every month, or you’ve already fallen behind on your payments. In that case, refinancing and strategically paying off your loans won’t be available to you.
On top of that, private lenders don’t offer income-driven repayment plans that tie your bill to the amount you earn, like federal loans do — which comes as a surprise to many grads.
“Some borrowers reported that they did not know they had fewer options when repaying their private student loans than they did with their federal student loans,” the Consumer Financial Protection Bureau noted in a 2012 report.
Private lenders will sometimes work with borrowers, however, even if they don’t publicize that help on their websites. Modification programs have been popping up more frequently in recent years, and lenders such as Discover, Wells Fargo and Sallie Mae have responded to increasing pressure to give borrowers some relief.
Your best bet is to go to the source: Call your lender and ask what it can do for you.
“If they have a modification program, it’s going to be very proprietary to that lender and it’s going to be different from one lender to another,” Weber says.
Start by requesting an interest rate reduction or lower monthly payment, even for a temporary period. Those options are better than postponing your payments through forbearance, which means interest continues to accrue and will be added to your total balance.
Your goal should be to stay current on your private loan payments so you don’t default; private loans generally have a shorter timeline before default than federal loans do. Default can drastically lower your credit score — and, therefore, your ability to get an apartment, mortgage or car loan in the future.
But you can avoid it by choosing one of these strategies and staying focused on a future with less private loan debt.