November 23, 2017

Private Student Loans

Private student loans are issued by banks, lenders, credit unions or other financial institutions.   You and your parents may have borrowed funds from a private lender because you had exhausted any Direct or Stafford federal student loans available to you 1.

Unlike the case with federally issued or guaranteed student loans you have no right to refinance or consolidate your private student loans.  Similarly, private lenders do not have to offer deferments or even grace periods 2

The Co-Signer Problem

Private student loan lenders often require you to find a co-signer for your private loan.   Co-signing a loan is dangerous because the co-signer will be expected to pay the loan balance in full if the original borrower defaults.   Co-signers are subject to the same limitations as borrowers when it comes to bankruptcy discharge.

One issue that sometimes arises with co-signed student loans has to do with something called an acceleration clause.   Boston student loan lawyer Adam Minsky writes about this issue on his blog in a post entitled The Death and Bankruptcy Clause in Private Student Loan Contracts.  Basically, Adam points out that many private student loans include provisions that make the entire balance of the loan due if either the borrower or co-signer dies or files bankruptcy.  In theory, therefore, you could be totally current with your payments, but if a co-signer files bankruptcy or dies, you have to come up with the cash to pay off your loan.

Some Loan Servicers Handle Both Private and Federal Loans

In my practice I always advise my clients to obtain an NSLDS printout of their student loans.  This printout will show their federal or federally guaranteed portfolio of student loans, but will not show private loans.  I also strongly recommend that my clients obtain credit reports from all 3 major credit bureaus.  Credit reports will show private student loans.

Interestingly loan servicers like Sallie Mae may handle both federal direct loans and private loans.  So we would need to know more than “Sallie Mae is servicing my loan.”

Strategies to Deal with Private Student Loan Problems

If I am helping a client deal with a private student loan, my toolbox will be much different than my options when facing federal student loan problems.   Some of the strategies I can use include:

  • determining if there are any forbearance or deferment options
  • seeking relief from private loan ombudsman
  • seeking assistance from Consumer Federal Protection Bureau (CFPB) ombudsman
  • finding and evaluating a refinance lender
  • evaluating for undue hardship bankruptcy discharge
  • evaluating efficacy of filing for bankruptcy to discharge other debts or to surrender secured property to increase disposable income needed to pay private student loan debt
  • asset protection strategy – a good strategy for those whose only source of income is Social Security
  • statute of limitation defense
  • FDCPA claims
  • other federal or state law consumer protection claims
  1. Generally, federal direct loans offer better terms and superior repayment options to private loans.   If you are a prospective borrower, you should exhaust your federal direct loans before moving on to private loans.  See this U.S. News & World Report article about private student loans to learn more.
  2. Some private lenders do offer deferments and grace periods – it depends on the lender.
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Jonathan Ginsberg

Jonathan Ginsberg has served the Atlanta area community as a personal bankruptcy and student loan debt management lawyer for over 25 years. Contact Jonathan for straight answers to difficult debt problems.