A Look at Private Loan Forgiveness
Many people confuse public and private student loans. Public loans are those that come from the federal government regardless of which private sector firm manages them. Private loans come directly from privately owned banks and other lending institutions. Today, approximately 85 percent of student loans are from the federal government with only 15 percent of student loans being private.
This is important to know and understand because there is a lot of talk about student loan forgiveness. In fact, there are several options available to those who have federal student loans. In March of 2012, the Obama student loan forgiveness program went into effect and will bring many options to people to refinance, reduce or completely discharge their loan. But this is only true for federal student loans.
Private student loan forgiveness is near impossible. At the time of this writing, a private student loan cannot be discharged with bankruptcy. In the past, this has only been true for federal student loans, but private loans were eligible to be discharged like any other debt. Now, for the purpose of bankruptcy, these private loans are in the same category as child support and income taxes. There has been talk of changing the law to allow this type of student loan to be included in a bankruptcy, but there has been no change to date.
It is possible to renegotiate with a lender to reduce interest rates or other types of refinancing to make the loan more affordable, but unfortunately, without any leverage such as filing for bankruptcy, private lenders have little motivation to renegotiate the loan.
If the loan is delinquent, at a certain point the lender will write off the loan as a bad debt and turn it over to a collection agency. An agency will do everything they can to collect on the debt and may be able to take the debtor to court to get a wage garnishment. However, many people have been able to avoid this, but usually with the help of an attorney.
In some cases, a debt collector will offer options for settlement or payments. They get most of their income from collecting debt, so collecting a portion of the debt is better than collecting nothing. In this situation, you will need to consult an attorney to make sure that any settlement or repayment options are documented properly.
It should be pointed out that there is one exception to a private student loan being discharged through bankruptcy and that is in cases where a person is permanently disabled. There are strict rules to qualify for this type of exception, and it takes the services of an attorney to file the proper paperwork. A doctor will have to sign off that the medical condition is serious enough that you cannot work and are therefore unable to pay back the loan. For a discharge of your loans, there will be a monitoring period in which the courts make sure that you do not get a job or engage in any behavior that would indicate that you are not disabled enough to be unable to pay back the loan.