Borrowers with private student loans lack many of the protections afforded to those who hold federal higher education debt. Recent moves by the Consumer Financial Protection Bureau (CFPB) can serve as the perfect example.
The CFPB recently warned banks engaging in automatic defaults on private student loans that they could face legal action. Automatic defaults are triggered when a cosigner dies or files for bankruptcy. Once this occurs, borrowers are thrust into default, even if they were previously in good standing. One could argue that lenders are doing this to make more money, as defaulted private loans come with tens of thousands of dollars in additional fees.
As awful as this practice is, there are even more downsides to private loans.
High and variable interest rates: Many private student loans have variable interest rates, meaning they can change. Most federal loans have fixed interest rates that never change. Even worse, interest rates on private student loans are often higher, meaning borrowers pay more over the life of the loans.
Lack of income-based repayment options: In previous blogs, we have spoken at length on income-based repayment options and how they help debtors lower monthly payments. Most private loans do not guarantee these options. Borrowers with federal loans can take advantage of income-based repayment options, such as REPAYE or the IBR.
Lack of forbearance and deferments: Facing economic hardship or unemployment? Private loan servicers will not always offer the same benefits granted to federal loans and may still demand payments. With federal loans, borrowers can receive temporary periods of forbearance or hardship deferments under most circumstances.
Private Student Loans May Attract More Attention from the CFPB
Getting the picture? Borrowers with private student loans have a more difficult time lowering their monthly payments, which can cause debts to accrue in other areas. If they have a cosigner who dies or files for bankruptcy, they can automatically default and accrue tens of thousands in fees. Despite all of these factors, it is still more difficult to file for bankruptcy on student loans than other types of debt. The consequences of private student loans can create a truly hellish financial situation.
It is likely we will continue to see the CFPB take on a greater role protecting student loan borrowers, so expect future updates on our blog.
The Kansas City bankruptcy attorneys at The Sader Law Firm are dedicated to helping struggling borrowers find solutions to ease student loan debt.