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What to Do When You Can't Repay Private Student Loans

By Dana George – Updated Feb 6, 2020 at 11:30AM

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The solutions vary from simple to extreme, but no matter your situation, you can make your student loans easier to pay off.

Remember how exciting college was? There were new people to meet, experiences to share, and little room for thoughts like, "Hey, how am I going to pay these student loans after graduation?" Yet there those loans were, six months after graduation, staring you in the face.

Student loan debt in the U.S. exceeds $1.5 trillion, and $119.3 billion of that total is owed to private lenders. If you're one of the 13% of Americans making at least one student loan payment each month, you may understand the challenge of managing your debt.

Among  Americans with student loans, some are faced with a series of troubling questions. Will I ever be able to get married and have kids? Will I ever buy a home? How old will I be when these stupid things are paid off? And finally, What am I supposed to do if something happens and I can't pay my private loan? 

Hopefully, one of these four suggestions will work for you, and you won't feel the urge to flee the country to escape the debt.

Talk to your lender

Private loans have fewer protections in place than federal loans, and private lenders can be prickly about negotiating with borrowers. As far as they're concerned, your student loan does not differ from a car loan, and they expect to be repaid, regardless of your circumstances. Since they can't repossess your degree, private lenders take other measures. They can report missed payments to the credit bureaus, add collection charges, seek repayment from a co-signer if you have one, or get a court judgement against you.

As awful as that sounds, none of it benefits the lender if they still don't get paid. If you're lucky, your lender is one of the few that offer forbearance, a temporary break from making payments (but not from accruing interest). If not, your job is to politely explain your situation, tell your lender you want to repay the loan, and ask them to help you do that by changing the terms. That may mean lowering your interest rate, forgiving penalties, or extending the time you have to repay. 

Refinance 

If your lender will not change the terms of your loan, it's time to consider refinancing with another lender. Be prepared to do an end run around two problems. The first involves your credit score. If you've missed payments, that has probably been reported to the credit bureaus, which means your credit has taken a hit. If this is the case, apply for a refinance with a lender known to work with lower credit scores. Some lenders will offer refinancing to borrowers with scores as low as 650 (generally considered a "fair" credit score).

There is a caveat, though. The low rates you may see advertised are reserved for those with the best credit scores, so you can expect to pay a higher interest rate. It's also likely that you'll need a co-signer, particularly if your debt-to-income ratio is high. 

Also consider how much you'll end up paying for a refinanced loan in the long run. Say you originally borrowed $10,000 for 10 years at 6% interest. Your monthly payment is $111, and the total interest on the loan will amount to $3,322. To lower your payment, a lender suggests you extend the loan to 20 years, at an interest rate of 7%. Now your monthly payment is knocked down to $78, but you'll pay $8,607 in interest -- that's $5,285 more than if you'd kept the 10-year loan. 

Do the math and look at all your options before you refinance.  

Add income

The suggestion that you "add income" when you're already struggling may strike you as insulting, but bringing in more income is one thing you can control. Decide how much you need each month and choose a money making activity that fits your schedule and talents. You can easily mix and match, making some money through one activity and more through another.

  • Pick up deeply discounted items online and resell them for a profit.
  • Use your knowledge in fields like IT or law to answer questions on websites like JustAnswers. It's fun, and you'll be paid for your answers.
  • Become a pet sitter.  
  • Sign up with TaskRabbit to complete specific tasks for people in your area. 
  • Become a shopper for those who cannot or prefer not to go out. Create a brochure and let people in your neighborhood know you're available for hire.

Give music lessons, write resumes, wash and detail cars -- do whatever you're good at to earn the funds that will pay that private loan.

File for bankruptcy

There's a commonly held belief that student loans cannot be discharged through bankruptcy. Although that's not exactly true, making it happen is about as easy as threading a needle while skydiving.  

Here's how it works: You file a bankruptcy case and, immediately afterward, file an adversary complaint stating that your federal and/or private student loans are an undue hardship. The problem is that no one has ever precisely defined what an "undue hardship" is. To come up with a fair definition, the courts eventually settled on what's called the Brunner test. 

At a minimum, the Brunner test requires that you prove three things:

  • You will have less than a minimal standard of living if you pay your student loans.
  • Your financial situation is not likely to change.
  • You have made a good-faith effort to repay the loans.

The challenge for a bankruptcy judge is the inability to predict whether your situation will ever improve. Case law shows that student loans have been discharged in bankruptcy, but it is exceedingly rare. For example, student loans have been discharged for people who suffer from serious health issues or co-morbid situations like homelessness and severe mental illness.

Student loans are a heavy burden, and many legislators and would-be presidents are promising solutions to this nationwide problem. But theoretical remedies do nothing to help you today. Fortunately, there are practical measures that can help you feel like you're back in the driver’s seat.

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