Can Private Student Loans Be Forgiven? A Guide
Updated on June 7, 2024
Quick Facts
No Standardized Forgiveness: Private student loans do not have standardized forgiveness programs like federal loans. Forgiveness is rare and typically only available in specific situations.
Limited Forgiveness Options: Private loan forgiveness may occur in cases of permanent disability or death of the borrower. Always check with your lender for specific policies.
Alternatives to Private Student Loan Forgiveness: Explore hardship programs, settlements, refinancing, lender-specific repayment plans, legal advice, and redirecting federal loan payments to manage private loan debt.
Many borrowers hope for private student loan forgiveness due to repayment difficulties, especially as federal forgiveness programs have expanded under the Biden administration. But these programs do not cover private loans from lenders like Sallie Mae, SoFi, and Discover because the rules differ significantly.
Federal loans offer multiple forgiveness options. In contrast, private lenders focus on profitability, providing loans based on credit scores with the aim of earning returns for shareholders.
As a result, private loan forgiveness is generally limited to extreme circumstances like permanent disability or death. Even in the face of financial hardship, lenders expect regular payments.
This article will review options for private student loan forgiveness and discuss alternative strategies to manage monthly payments if forgiveness isn’t possible.
Programs
Can Private Student Loans Be Forgiven?
Private student loans, unlike federal loans, do not have standardized forgiveness programs. However, forgiveness may occur in specific situations:
Total and Permanent Disability: Some lenders may discharge private student loans if the borrower becomes totally and permanently disabled. Documentation from a physician is usually required.
Death of the Borrower: In the event of the borrower’s death, some private lenders may forgive the remaining loan balance. This policy varies by lender and should be confirmed in the loan agreement.
Settlement: Borrowers may negotiate a settlement with the lender, especially if they are experiencing financial hardship. This process typically involves paying a lump sum that is less than the total outstanding balance to settle the debt.
Bankruptcy: While discharging private student loans through bankruptcy is difficult, it is not impossible. Borrowers must prove “undue hardship” in an adversary proceeding, which can be challenging and requires legal assistance.
Lender-Specific Programs: Some lenders might offer their own relief programs, including forgiveness or repayment assistance, under certain conditions. Borrowers should contact their lenders to inquire about available options.
Overall, while private student loan forgiveness is not common, borrowers have a few avenues to explore for potential relief. It is crucial to review the specific terms of the loan agreement and communicate directly with the student loan lender to understand available options.
Related: Biden Student Loan Forgiveness
Why Private Loans Rarely Offer Forgiveness
Banks, credit unions, and other financial institutions are the main issuers of private student loans. They operate with profit in mind. They assess borrowers’ creditworthiness and adjust interest rates to mitigate risk. This focus on profitability explains why they seldom forgive loans.
Contrast this with Federal Objectives
The federal government operates under different imperatives. Its role is not just to ensure loan repayment but also to make higher education accessible to all. This is clear in programs like Pell Grants and the availability of federal loans, despite credit scores.
Incentives for Public Service
The government also aims to attract skilled individuals to critical sectors like education, healthcare, and legal services in underserved areas. To achieve this, it offers various income-driven repayment plans and specialized forgiveness programs, such as Teacher Loan Forgiveness and Public Service Loan Forgiveness.
Alternative Relief Options for Private Student Loans
If you need private student loan forgiveness or are looking for ways to manage your debt, consider the following steps and strategies:
Contact Your Lender
Start by reaching out to your lender to discuss your situation. Ask about any available hardship programs, loan modifications, or forgiveness options they may offer. Some lenders provide unique relief programs, so check your lender’s website or speak with a representative to see if any special programs apply to your situation.
Review Your Loan Agreement
Carefully read your loan agreement to understand the terms and conditions related to forgiveness, discharge, or settlement. This can provide insight into what options may be available to you.
When exploring any forgiveness program, review the section detailing eligibility requirements. Additionally, contacting your lender or loan servicer directly can provide you with specific information tailored to your situation.
Explore Disability or Death Discharge
If applicable, check if your loan offers discharge options for total and permanent disability or in the event of the borrower’s death. This typically requires specific documentation and proof.
Consider Settlement
If you are experiencing financial hardship, you might negotiate a settlement with your lender. This involves agreeing to pay a lump sum that is less than the total loan amount. Be prepared to present evidence of your financial difficulties.
Seek Legal Advice for Bankruptcy
Discharging private student loans through bankruptcy is challenging but not impossible. Consult with a bankruptcy attorney to understand the process and whether you might qualify for an undue hardship discharge. This involves filing a Chapter 7 or Chapter 13 bankruptcy, followed by an adversary proceeding to prove undue hardship.
Consult a Financial Advisor
A financial advisor can help you explore all possible options, including loan consolidation, refinancing, or alternative repayment strategies, to manage your private student loan debt. If you’ve defaulted on your loan, some private lenders may agree to a settlement. Terms can vary, but student loan settlements often range from 40-70% of the current loan balance, payable either as a lump sum or through installment payments.
Redirect Payments from Federal Loans
If you have both, federal and private loans, consider pausing or reducing federal loan payments and reallocating those funds to your private loans. Private loans often have higher interest rates and fewer affordable repayment plans. This approach can help you tackle high-interest debt more effectively. However, note that increasing your federal loan balance due to accruing interest may affect future repayment plans.
Consider Refinancing
Refinancing can be useful if you have high-interest loans and a strong credit profile. Use platforms like Credible to compare loan terms across multiple lenders. Note that refinancing federal loans with a private lender will disqualify them from federal forgiveness and income-based repayment plans. For more details, refer to our guide on student loan refinancing.
Explore Lender-Specific Repayment Plans
Many private loan servicers offer temporary relief options such as interest-only payments, deferments, or forbearances. Deferment may be available if you return to school or serve in the military, while forbearance can be an option during financial hardship, such as job loss or medical emergencies.
Taking these steps can help you identify potential avenues for relief and make an informed decision about managing your private student loans. If forgiveness isn’t an option, these strategies can ease the financial burden and help you manage your debt more effectively.
State-Sponsored Assistance
Several states in the U.S. have designed programs to alleviate student loan burdens as a means to attract new residents and retain essential workers in key industries. With student loan repayments resuming, exploring these state-sponsored incentives can be beneficial.
Illinois: Targeting teachers, nurses, and public defenders, Illinois offers programs that assist in paying off student loans as part of career retention strategies. Notably, the Smart Buy home buying program aids eligible new homebuyers by paying up to 15% of the home purchase price in student loan balances, with a cap of $40,000. This program aims to ease the financial burden for those struggling to buy a home due to existing student debt.
Kansas: The Rural Opportunity Zones (ROZ) program encourages migration to rural areas by offering incentives such as income tax waivers for up to five years and student loan repayments up to $15,000. This initiative is open to new full-time residents in specific rural counties.
Maine: The Maine Opportunity Tax Credit is designed for graduates residing in Maine who meet certain academic milestones post-2007. This program can provide up to $25,000 in lifetime student loan forgiveness. Eligibility includes maintaining full-time residency in Maine and filing a Maine income tax return.
Maryland: Through the SmartBuy 3.0 program, Maryland supports homebuyers by allocating up to 15% of the home purchase price towards clearing their student loans, up to a maximum of $40,000. This benefit is available to those who provide a minimum down payment of 5% and purchase an eligible home under the Maryland Mortgage Program.
Using 529 Plan Funds
In 2019, new legislation was enacted that permits the use of earnings and distributions from a 529 college savings plan to repay private student loans.
However, there are restrictions on the amount that can be applied to these loans. Specifically, qualified distributions are capped at $10,000 per borrower over their lifetime, rather than annually. This means you cannot withdraw $10,000 each year from your 529 plan for loan repayment.
Disability and Death Provisions
Some lenders offer loan cancellation in cases of permanent disability or death of the primary borrower. But cosigners may still be held responsible sometimes.
Navient, once known as Sallie Mae, has been embroiled in legal controversies for issuing private student loans under conditions that predicted low repayment rates, especially to for-profit school attendees.
In a significant 2022 settlement with state attorneys general, Navient canceled $1.7 billion in loans for defaulted borrowers but left those still paying without relief.
To address these issues, Navient unveiled a “school misconduct discharge” process where borrowers can request loan forgiveness by documenting educational misrepresentations.
Related: How to Lower Private Student Loan Payments
You may have other options to lower your monthly bill. Contact your student loan servicer to learn your options.
Private Student Loan Forgiveness Programs
Loan Servicer
Death of Borrower
Death or Disability of Cosigner
Disability of Borrower
Contract for More Info
Be Cautious of Scams
As pandemic-related relief measures wind down, fraudulent schemes targeting federal student loan borrowers especially are on the rise. Be wary of claims promising immediate loan cancellation through non-existent programs like ‘Biden Loan Forgiveness’ or ‘CARES Act Loan Forgiveness.’
While the Department of Education has expanded forgiveness for specific groups, these changes do not apply to private loans. If you’re approached for personal information or payments for loan cancellation, it’s likely a scam.
If you’ve been approached with a scam, contact the Consumer Financial Protection Bureau. The CFPB can help protect you and other consumers by shutting down scam artists looking to take advantage of the noise surrounding student loan forgiveness.
Bottom Line
Various strategies can help you manage your private student loan debt. If you’re seeking expert guidance, our team specializes in helping borrowers with both federal and private loans.
Sometimes that means finding ways to get a lower monthly payment with student loan refinance lenders. Other times it means exploring forgiveness options. And still other times it means negotiating a settlement or exploring bankruptcy as a solution.
Schedule a consultation today, and let’s collaborate on a plan tailored to your future goals.
FAQs
Is there hope for private student loan forgiveness?
Currently, there are no established programs or foreseeable plans that offer forgiveness specifically for private student loans. Private loans are issued by private lenders and are not subject to the same regulations and forgiveness programs that apply to federal student loans.
Will I pay taxes on any forgiveness given?
Under the American Rescue Plan Act of 2021, any student loan forgiveness granted between January 1, 2021, and December 31, 2025, will not be considered taxable income by the federal government. This means borrowers whose student loans are forgiven during this period will not owe federal taxes on the amount forgiven.
Are private student loans eligible for PSLF?
No, private student loans are not eligible for the Public Service Loan Forgiveness (PSLF) program. PSLF is specifically designed for federal student loan borrowers who are employed in public service jobs with government agencies or qualifying nonprofit organizations. Only federal loans provided through the William D. Ford Federal Direct Loan Program are eligible for this forgiveness pathway.
What's the difference between forgiveness, cancellation, and discharge?
When it comes to student loans, the terms forgiveness, cancellation, and discharge are often used interchangeably, leading to confusion among borrowers. While all three options ultimately lead to the elimination of student loan debt, there are distinct differences in their application and eligibility criteria. Forgiveness and cancellation typically refer to the release of the borrower's obligation to repay their student loans due to their job. For example, the Public Service Loan Forgiveness program allows borrowers who work full-time for government organizations or non-profits to have their remaining loan balance forgiven after making 120 qualifying payments. Similarly, Teacher Loan Forgiveness is available for teachers who work in low-income schools for five consecutive years. On the other hand, discharge is generally used when a borrower is no longer required to make payments due to circumstances beyond their control. These situations include total and permanent disability, the closure of the school where the loans were received, or the borrower's death. In these cases, the borrower or their estate may be eligible to have their loans discharged.
Do private student loans get forgiven after 25 years?
No. There is no loan forgiveness for private student loans after 25 years. You will keep paying the loans until they’re paid in full, you default and negotiate a settlement or the statute of limitations runs out, they qualify for one of the rare forgiveness options, or they’re discharged in bankruptcy.
Can private student loans be discharged in bankruptcy?
Yes, private student loans can be discharged in bankruptcy under specific conditions. It requires proving "undue hardship" through a rigorous legal process.
Will Biden forgive private student loans?
It is unlikely that President Biden will forgive private student loans directly. To date, none of the student loan relief measures introduced under his administration have specifically targeted private student loans for forgiveness. However, there have been instances where private student loans were discharged, but these were primarily through legal settlements resulting from lawsuits initiated by state attorneys general, rather than through federal forgiveness programs.
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October 14, 2024
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