If you’re having a hard time paying off your private student loans, you could catch a break soon. Two of the biggest private lenders are gearing up to relax repayment terms.
This week, Wells Fargo said it will lower interest rates for eligible borrowers starting this month and extend repayment periods starting in February. The bank, which has $11.9 billion worth of private student loans, anticipates the move will save borrowers thousands of dollars in interest payments over the course of the loan.
Another prominent lender, Discover Financial Services, is fleshing out the terms of its own modification program, with plans to launch early next year. The company, which holds $8.3 billion in private student loans, is considering lowering interest rates and forgiving some debt of borrowers in dire straits.
Private lenders — banks, credit unions and other financial firms that provide education loans — hold only 8 percent of the $1.18 trillion student loan market, but they get more flak than the federal government for being unwilling to work with struggling borrowers. The slate of federal plans that cap borrowers’ loan payments to a percentage of their income do not extend to private loans. Instead, borrowers have been at the mercy of private lenders, which, up until now, have mostly resisted restructuring debt.
Lenders have claimed that because student loans are packaged into securities and sold to investors, there are restrictions on those contracts that make it hard to adjust the terms for individual borrowers. Bank lenders, specifically, have said that accounting rules would require them to set aside more capital to offset any changes to student loans.
Wells Fargo’s head of education financial services, John Rasmussen, said the bank worked with regulators to hash out its program and was mindful of some of the challenges. In the end, he said, there were no major hurdles or barriers to rolling out the program.
“We’ve been hearing over the years that our students needed and wanted more options in those situations when they were having financial hardship,” Rasmussen said.
Wells Fargo will consider lowering the interest rate of any borrower who can demonstrate hardship. You don’t have to be delinquent on your loans to qualify. Rasmussen said the bank wants to hear from people who may be current on their payments but who foresee a rough patch because of a recent job loss or any other threat to their ability to pay.
He anticipates the program will help 600 to 1,000 borrowers by the end of this year. The company has been working on the program for the past 18 months and launched a test pilot in May with a few dozen borrowers. A majority of the people who participated had their monthly payment lowered by as much as 31 percent, according to the bank.
Rasmussen said the bank will reduce interest rates to as little as 1 percent for a few months or the life of the loan, depending on the borrower’s circumstances. Next year, Wells Fargo will also begin offering extended repayment plans of up to five years for people who need more help than an interest rate reduction can provide.