Private Student Loans: Is there any relief available?

Courthouse pillars

Private student loans are originated by private lenders and they may be insured by other private entities. They are not guaranteed by the United States Department of Education. Because these are not federal loans, the remedies that are available are much different if a default should occur. Therefore, careful consideration should be given before taking out a private student loan. From a practical standpoint, a student should take out the maximum amount he or she can in federal loans before taking out any private student loans.

Probably the most important thing to consider regarding private student loans is that state law governs their enforcement. Enforcement of a private student loan occurs when the lender sues the borrower and when the lender wins. Until then, a private student loan lender has no available remedy. Enforcement of a private student loan is essentially no different than enforcement of a credit card or other unsecured private debt.

When is a private student loan default? Well, technically a default occurs once a payment is missed. Private student loan lenders will often state that a default does not incur until least 120 days have passed since a payment was made, however, this is technically not the case. You may also default on a private student loan if you file for bankruptcy, become insolvent, providing any false or misleading statements in your loan applications, die, or break any other promise in the loan promissory note.

So, what type of relief is available for private student loan borrowers? Unfortunately, private student loan lenders are not required to grant deferments or forbearances; these are completely within the discretion of the lender. As stated above, enforcement of private student loans is governed by state law. Therefore, general contract defenses such as fraud, mistake, and forgery should be available. Additionally, defenses such as statute of limitations, infancy, chain of title, and proof of the debt might be available as well.

A chapter 13 bankruptcy may also be an option. A chapter 13 bankruptcy allows a borrower to pay something each month towards his or her private student loans and avoid litigation and other collection actions. A chapter 13 bankruptcy may also offer protection for cosigners as well. It is important to note, that upon completion of a chapter 13 plan the outstanding student loan debt will not be discharged. Additionally, interest will continue to accrue on the unpaid balance of the private student loan during a chapter 13 case. What chapter 13 offers to a student loan borrower, especially a private student loan borrower, is time. When it comes to private student loans, chapter 13 is not an answer. It is, however, a tool that may be used by someone to help them regain control of their finances.