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Updated on Monday, December 1, 2014
If you’re one of the many people finding it difficult to pay back your private student loans, Wells Fargo recently released the promising news that they are moving forward on the private student loan modification pilot program they rolled out earlier this year.
What does this mean for borrowers? Two things:
First, it’s fantastic news for the industry in general. Private student loans have lagged behind, offering a limited number of options that are greatly dependent on your lender. In contrast, federal loans offer many benefits for borrowers such as deferment, forbearance, and a large selection of income-based repayment options.
The Consumer Financial Protection Bureau has been critical of bigger banks that haven’t been willing to extend repayment options to borrowers, and the banks have finally listened.
Second, this means that student loan payments are about to become more affordable for a select group of people. Let’s look at what loan modification programs can mean for borrowers.
Which Lenders Are Offering Student Loan Modifications?
Four big lenders are offering more flexible repayment options than they have before to lessen the burden on student loan borrowers.
Let’s look at Wells Fargo first. The bank’s recent announcement highlighted some significant changes they’re hoping to make.
The Wall Street Journal has reported that Wells Fargo is offering reduced interest rates as low as 1% to borrowers facing financial hardships. These reductions are temporary or permanent, depending on the situation you’re in (more on that below).
They’re also going to be offering extended repayment terms (by 5 years) come February 2015.
Wells Fargo wants to lower borrower payments to 10%-15% of their total income, and according to the bank, individuals in the pilot program lowered their monthly payment by as much as 31%.
This reduction in interest rate is extremely good news for those with private student loan debt, as the average interest rate on private loans is 10%-12%, much higher than federal loans. By slashing the interest rate, borrowers will pay less over the life of the loan as well. This is a better option as opposed to extending the repayment period, as that typically amounts to more paid with interest accounted for.
Discover also announced it plans on introducing a similar loan modification program early next year. The details have yet to be disclosed to the public, but they did start offering interest only payments earlier this year to borrowers who were less than 60 days late on their loans.
Discover has mentioned that they are planning on lowering interest rates, and will possibly waive balances for some borrowers that have been hit the hardest.
Discover has also already been making headway in offering more options for borrowers, which include reduced payments, deferment, forbearance, and payment extensions. Offering private student loan borrowers similar benefits that federal borrowers get to enjoy is a step in the right direction.
The great thing about this announcement is that other private lenders who offer flexible repayment options are being mentioned. If these lenders have been offering more repayment options, your lender might be as well.
Since 2009, Sallie Mae Bank has been offering 1% interest rates, for sometimes up to two years, to borrowers that were delinquent on their loans.
Similarly, PNC lowered the interest rates of select borrowers to 0.6%, for as long as 18 months, earlier this year.
This goes to show that private lenders are becoming more and more willing to work with borrowers to give them some breathing room where student loans are concerned. But who can really benefit?
What Are the Qualifying Situations for Loan Modifications?
At this point, these loan modification programs are being targeted to two groups:
- Those that are behind on payments by 30-119 days
- Those that are anticipating a loss of income in the future, thereby making it difficult for them to afford the monthly payments
Borrowers who have defaulted on their loans will not qualify for a loan modification. A loan is typically considered to be in default after 120 days have passed with no payments made.
Borrowers in the second group that are anticipating loss of income due to medical reasons, a job loss, or a pay cut, may also apply for consideration. If your income can’t keep up with your payments, and you’ve done all you can to cut your expenses, it’s worth applying.
Wells Fargo currently requires proof of income to assess your situation. As the press release states, they are evaluating borrowers on a case-by-case basis, so don’t be deterred if someone you know has tried to apply and was turned down.
For now, the exact parameters of qualification aren’t available to the public, which is why calling your lender and speaking with them regarding your individual situation is important.
Credit checks are likely to be ordered, but this is mostly for the purpose of seeing what your overall financial situation looks like, including any other debts you may have. Lenders take more than just your score into consideration.
Based on your situation, you’ll either be given a temporary loan modification or a permanent one (if it doesn’t look like your situation will improve).
For other repayment options, such as Discover’s interest-only payments, proof of income typically isn’t required.
Bottom line: you need to be able to show that you’re experiencing financial hardship, and cannot afford your payments on the term you have now.
How is a Loan Modification Different from Forgiveness, Consolidation, or Refinancing?
It’s worth noting that loan modifications are different than forgiveness, consolidation, and refinancing.
Student loan forgiveness means that the entirety of your student loan balance is forgiven, or waived. It’s widely only available to those with federal student loans. Forgiveness is usually granted to those under special circumstances, such as volunteer work, working for a non-profit, working in the medical or law field, or being a teacher in the public sector.
There are very few private lenders that offer forgiveness, and if they do offer it, it’s only under dire circumstances. For example, if a borrower dies, or is completely disabled, then their loan balance may be forgiven. For Discover to announce that they’re thinking of waiving loan balances is a huge step as far as private lenders go, but we don’t yet know what it will take to qualify.
A loan modification will not wipe out your student loans completely like forgiveness will.
Loan consolidation is useful for borrowers who are making payments to a number of different lenders, and are having trouble keeping track of it all. You can consolidate both federal and private student loans separately, but you can’t apply for a Direct Consolidation Loan with just private loans. You’d have to consolidate private loans through a private lender. When consolidating, you may be eligible for a longer repayment term, and a lower interest rate, but it’s dependent upon the loans you’re consolidating.
A loan modification means you’re adjusting the repayment terms on one of your loans. It doesn’t mean you’re combining all of your loans into one big loan, like consolidating your loans will do.
When refinancing a student loan, you’re hoping to get a lower interest rate, or a longer repayment term, to make your payments more affordable. Refinancing sounds similar to getting a loan modification, but the difference is that most lenders won’t refinance loans that are delinquent or default. The qualifications for refinancing are also much stricter.
With a loan modification, lenders are looking to work with you. If your credit isn’t the best, or if you’re delinquent (but not in default!), you still have a chance at working something out.
The Takeaway and What to Do
If you’re a borrower struggling to make payments and just squeaking by, or are already a little behind, you should reach out to your lender and ask them what options are available to you.
Bigger lenders such as the four that we mentioned aren’t going to reach out to you and tell you that you’re eligible for a loan modification. They don’t have time to sort through the millions of borrowers that have loans with them.
If you want your student loan payment situation to change, you must take action. The worst that can happen is your lender says no, and you’re back where you started. Don’t wait before it’s too late – as you should already know, having your loans default is the worst thing that you can let happen. Take advantage of the fact that private lenders are opening up their doors to struggling borrowers.