Student loans are confusing. There are many different types of student loans, and it is hard to tell what type you have. The two most basic categories of student loans are public student loans, and private student loans.
According to the Consumer Financial Protection Bureau, about $150 Billion of the $1 trillion dollars of outstanding student loans in July 2012 were private (Source, at CFPB).
PRIVATE STUDENT LOANS – WHERE DO THEY COME FROM?
Private student loans are made by private banks, and are not made by the government. These loans are usually originated with companies like Discover, Wells Fargo, or Chase (although Chase is leaving the business).
They can be serviced by Sallie Mae, which also services public loans. There are yearly maximum amounts that a student can borrow from public student loans, and once a student has passed these amounts, they must turn to private banks if they need more money.
These loans are most commonly given to people who attend for-profit colleges, or private universities. This is because these schools tend to be more expensive and have fewer scholarships.
Since it costs more, the student must borrow more to complete the degree. Sometimes these schools do not make it clear to students that they are taking out a private student loan.
42% of students at for-profit colleges got private student loans, whereas only 14% of all undergraduate borrowers used a private student loan (source: CFPB).
The government does not guarantee these loans, so if the borrower never pays it back, then the lender loses money. This is one reason why they have higher interest rates and often ask for cosigners.
Sometimes private student loan lenders will buy a private insurance policy that will reimburse them if the loan is not repaid. Even though the governement does not guarantee these loans, they are still nondischargeable in bankruptcy.
PRIVATE STUDENT LOANS – BORROWING TERMS
Private student loans also tend to have worse payment and borrowing terms than federal loans. When you take out a private student loan you can choose a fixed or adjustable interest rate.
The fixed rate loans, in July 2014 have interest rates from 6% to 11% (Source, Discover), and lower interest rates for adjustable loans. These numbers are higher than unsubsidized public student loans, which currently have a 6.8% interest rate and subsidized public loans have a 3.86% interest rate (Source, Stafford Loans).
Private student loans usually accrue interest while the borrower is in school, and some even require monthly payments while the borrower is in school. For the most part, these loans are no more regulated than other consumer loans.
The lenders are free to create requirements and make the contracts as they please. These loans, however, are not dischargeable in bankruptcy.
Cosigners are also another common requirement of private student loans. Depending on credit rating and your other assets, private student lenders often require a parent or relative to cosign the loan. This means that the cosigner owes 100% of the loan if the primary borrower doesn’t pay.
PRIVATE STUDENT LOANS – WHAT HAPPENS AFTER DEFAULT?
Default is when the borrower stops paying on the loan. With a private loan this happens immediately upon a late payment, and will affect the borrower’s credit report immediately.
Unlike with public student loans, there are not a variety of repayment plans and “catch-up” plans to help you get out of default. Either you pay and it is fine, or you don’t pay and it goes to collections.
If you don’t pay a private student loan long enough, the lender will get a civil judgment against the borrower and any cosigners.
This civil judgment allows them to garnish wages, levy bank accounts, and, in Minnesota, it becomes a lien against any land owned by the debtor in the county where the judgment is docketed.
A public loan can garnish wages without first getting a judgment, and can also take tax refunds. Private student loans cannot seize tax refunds.
A civil judgment in Minnesota lasts for 10 years, and can be renewed for another 10 years. The private student loan lender has a 6-year time limit from the date of the last payment or acknowledgment of the loan to get the judgment.
If they don’t get the judgment by the end of the 6 years, then the borrower has an affirmative defense called a “statute of limitations defense” against the judgment. You should consult a lawyer if you are thinking of bringing a statute of limitations defense.
If you need help navigating the world of student loans, then call my office at 612-824-4357 to set up a free consultation. We will work with you to find out what can be done, and many options do not involve bankruptcy.
