Despite a slight decline in default rates, student loan debt woes continue to plague millions of borrowers, particularly those who took on private loans to foot the bill for their education. A report issued by the Consumer Financial Protection Bureau in October found that complaints about private lenders increased by 38 percent over the previous year, with a lack of repayment options cited as the number one problem.
In addition to pointing out some of the shortcomings of private lenders, the CFPB also issued several recommendations aimed at easing the burden for cash-strapped grads. One of those recommendations centered on making loan modifications available for grads who are experiencing a financial hardship. Recently, Wells Fargo and Discover, two of the largest private student loan issuers, announced that they would be moving forward with a loan modification program for distressed borrowers.
If you’re wondering whether you’ll be able to take advantage of the new student loan options, here’s a brief rundown of what we know so far.
1. How the loan modifications work
The goal behind the modification programs is to help out borrowers who are going through a temporary situation that’s keeping them from making their payments. For students who borrowed from Wells Fargo, that means a reduction of your interest rate to as little as 1 percent. In an interview with the Washington Post, Wells Fargo’s head of education financial services, John Rasmussen, said that the reduced rates could be effective anywhere from a few months to the entire life of the loan, depending on what kind of hardship the borrower is facing. An extended repayment plan option, which would allow an extra five years to be tacked on to the loan term, is also in the works for students who need help beyond the interest rate reduction.
Discover is still nailing down the exact details of its modification program, which is set to debut in 2015, but it’s currently allowing certain borrowers to make interest-only payments towards their loans. It’s expected that once the program is finalized, eligible borrowers would be able to qualify for interest rate reductions or even partial forgiveness for a portion of what they owe.
2. Which borrowers qualify?
Not every student will be able to ease the pressure of their student loan debt through these modification programs. Wells Fargo requires borrowers who apply to have a demonstrated financial hardship. If you took out your loans with a co-signer, they also have to be able to show that they’re experiencing some kind of financial difficulty because of an illness, job loss or other factor that’s beyond their control.
You can’t get help through the program if you’re more than 130 days late on your payments or already in default. You don’t have to be delinquent to qualify and Wells Fargo is encouraging students to seek out a modification if they foresee a situation that would make paying their loans difficult. At this point, it’s still unclear which Discover borrowers would be able to qualify for a modification.
3. How you can benefit
Obviously, the primary benefit of the new student loan options is that it can help borrowers who are in a tight spot avoid default. Once you default on your loans, you open the door to a number of serious financial consequences, including damage to your credit score and the possibility of a lawsuit if your lender is aggressive about trying to collect. Getting the lender to negotiate different repayment terms at this point is usually difficult since the lender already considers you a risk.
The other advantage for students who qualify is the potential to shave hundreds or even thousands of dollars off their loans through the interest rate reduction. Private student loans are notorious for carrying much higher interest rates than federal loans so if you’re able to knock off a point or two, that could add up to some substantial savings in the long run.
Not only that, you may be able to lower your monthly payment, which can give you a little more breathing room if you’re working with a tight budget. According to Wells Fargo, the majority of people participating in the pilot modification program saw their payments reduced by as much as 31 percent.
4. When a loan modification isn’t an option
Wells Fargo and Discover join Sallie Mae and PNC Financial Services as some of the lenders that offer modifications and interest rate reductions to borrowers but not every private loan issuer is willing to play ball. When you’re stuck in a situation where you’re having a hard time making your payments but your loan servicer doesn’t offer much flexibility, you may have to look for other options.
Refinancing your loans with another lender can help you to snag a lower interest rate and potentially cut down on what you’re paying each month, but that has its own difficulties. If you’re not making a lot of money, chances are you’re still going to need a co-signer to apply. Getting the lowest rates is also a challenge if your credit history isn’t that great.
If you absolutely can’t pay and you’re running into trouble getting a refinance, you could ask for a deferment or forbearance. Not all private lenders offer this option but if yours does, it can give you a little more time to get your finances in order while you figure out the next step.