Private student loans make up a small percentage of the total student loan market, but many more borrowers have moved toward private lenders to help fund their education in the past several years.
Private student loans offer some benefits over federal student loans, including the potential for a lower interest rate and extended repayment terms. However, borrowers with private student loans need to understand their repayment plan options from the start and pick the plan that works best for their timeframe and budget.
Private Student Loan Repayment Options
Private student loan lenders offer some variation when it comes to repayment plans for borrowers. You can choose from deferred, fixed, interest-only, and forbearance options. Here’s how each breaks down.
Under a deferred repayment plan, a student loan borrower does not have to make any payments on the outstanding principal balance or interest while in school. So long as a borrower is enrolled at least half-time with an accredited college or university, the private lender does not require a minimum payment each month.
Most lenders offer a grace period of six months after the student leaves at least half-time status before payments are due. While deferred payment plans are beneficial for students who have little to no income during their college career, they come with a caveat. Interest accrues on the loan(s) during the deferment period, meaning borrowers could end up owing far more than they initially borrowed.
Another repayment option is fixed repayment, which requires a monthly principal and interest payment from the start. Borrowers are expected to begin payments as soon as the loan is approved and funded. While this can be a strain on students who are not generating significant income while in school, a fixed repayment plan lowers the total cost of borrowing as interest charges do not have the chance to accrue over a long period.
Some private student loan lenders also offer interest-only repayment plans, where smaller payments of interest are due immediately. Once the student leaves half-time status at school and the grace period, if any, passes, full principal and interest payments are due for the duration of the loan.
This option is beneficial for students who feel confident they can cover a smaller payment while finishing their education. It also keeps the total cost of borrowing down as the interest is paid from the beginning of the loan.
Forbearance may not be an option for all private student loan borrowers, as this is lender-specific. When it is available, though, forbearance temporarily suspends the monthly payment requirement, similar to deferment. Interest still accrues during forbearance even when no payments are due, so it is necessary for borrowers to understand this can increase the total cost of borrowing over time.
Can You Get Private Student Loans Forgiven?
Getting a private student loan forgiven, or discharged, is not a common practice, but it is a possibility under certain circumstances. Private student loan discharge might be more likely to be approved when:
- A Borrower passes away
- A borrower becomes permanently disabled
- A borrower can prove an undue financial hardship that makes repayment impossible
Forgiveness and discharge require an in-depth review of a borrower’s circumstances by the private loan lender. In most cases, a borrower should reach out directly to the lender to gain an understanding of its forgiveness and discharge review process, including the documentation necessary to prove hardship or disability.
Can You Get Income-Based Repayment for Private Student Loans?
An income-based repayment plan is an option for federal student loans, but it does not extend to private student loan lenders. Income-based repayment options evaluate the earnings of the borrower and base monthly repayment on a percentage of discretionary income. Private student loan lenders do not offer income-based payment plans because eligibility for private student loans is based on, among other things, a borrower’s ability to repay the loan in full.
How to Lower Your Private Student Loan Payment
If the repayment plan initially selected with a private student loan is no longer affordable, borrower options are limited to refinancing to another private student loan lender. Student loan refinancing is the process of taking out a new loan to pay off the old, creating a new agreement with a new lender.
Payments of principal and interest are still required, but borrowers may have the opportunity to restructure the repayment term or lower the interest rate to reduce the minimum amount due each month. However, refinancing requires a strong credit history, verifiable income, and, in some cases, a cosigner to qualify. Refinancing also resets the clock on the loan, meaning it could take longer and cost more to repay the loan in full.