Private student loans make up less than 10% of the existing student loan debt in the United States, but they cause some of the worst student loan horror stories. Private loans don’t offer income-driven repayment or loan forgiveness. As a result, many borrowers desperately need President Biden to cancel their private student loans.
Unfortuantely, Biden’s options for canceling private student loans are limited.
Can Private Loans be Cancelled or Forgiven?
When politicians and student loan advocates call for student loan cancellation, they are usually referring to federal student loans. For example, the likely to be announced $10,000 of loan forgiveness will only apply to federal loans.
Under the Higher Education Act, the President can “enforce, pay, compromise, [or] waive” federal student loans. Though there is some debate about the President’s authority to cancel federal loans, there isn’t a debate over private student loans. He cannot cancel them on his own.
If Biden wants to help private loan borrowers, he must get creative.
Getting Congress to Act
Congress could choose to cancel private student loans. They could draft legislation to pay off private student loans, and borrowers would be free from their debt.
Given the current political climate and composition of Congress, such legislation would seem highly improbable.
However, as President of the United States, Biden has considerable influence over Congress. He could aggressively advocate for private student loan cancellation. He could refuse to sign any Congressional legislation until they vote to cancel private loans.
Biden has already advocated for Congress to cancel $10,000 of federal student loans, but debt cancellation hasn’t been a high-priority item on his legislative agenda.
Converting Private Loans into Federal Loans
Most borrowers realize that federal student loans are far more likely to get canceled than private student loans.
I’ve heard from many clever borrowers who want to convert their private loans into federal loans so that the debt might one day be eligible for forgiveness.
There are a few tricks borrowers can use to convert private loans into federal loans, but these options are minimal.
Here again, Biden lacks the authority to convert debt via an executive order, but he could call on Congres to pass legislation to convert the debt. Allowing borrowers to consolidate their private loans into a federal loan would provide significant relief for many struggling borrowers.
Sadly, Biden hasn’t advocated opening up this option, and it has gotten minimal discussion in the halls of Congress.
Bankruptcy for Private Loan Borrowers
One area where advocates have made some headway is on the subject of bankruptcy.
Presently, student loans are difficult but not entirely impossible to discharge in a bankruptcy proceeding. Many bankruptcy attorneys are unable to help borrowers discharge their student debt.
Notably, there is at least some bipartisan support for restoring bankruptcy protections for student loan borrowers.
President Biden could advocate passing legislation to give private loan borrowers the ability to have their debt discharged via bankruptcy. Borrowers would prefer loan cancellation, but by offering bankruptcy protections, the borrowers in the worst circumstances could move forward from their private loans.
Sherpa Thought: As the President, Biden can make life very difficult for private loan lenders. In addition to calling for bankruptcy, he could push the CFPB to target private student loan lenders aggressively.
However, this course of action could have a downside for current and future students. As private student loan lending gets more risky or expensive, interest rates will increase. Thus, Biden must balance the interests of future borrowers against the interests of present borrowers.
Executive Orders to Cancel Private Loans
Many borrowers want Biden to issue an executive order canceling private student loans.
Unfortunately, he doesn’t have the legal authority to cancel debt in this manner. He can’t simply tell banks that borrowers no longer owe any more money.
In other words, for private student loan relief, borrowers need Congress to act.
Options for Private Loan Borrowers
If you have private student loans, help in the form of cancellation is unlikely.
For this reason, many borrowers focus on eliminating their private student loans before attacking their federal loans — even if it means paying off a loan with a slightly lower interest rate first.
Finally, student loan refinancing is a great option for some borrowers to get their private loans under control. Refinancing requires a decent credit score and income, but it can lower your interest rates and monthly payments.
As of September 2022, the following lenders offer the lowest interest rates on private loan refinancing:
|Rank||Lender||Lowest Rate||Sherpa Review|
|T-2||2.49%||Splash Financial Review|