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Strategies to Get Student Loan Debt Under Control, Part 3-Private Loans

According to an article written by Allie Bidwell that appeared in U.S. News on 23 December 2013 titled, “Is the Private Student Loan Market as Bad as it Seems?”, the author analyzed data from the seven largest private student loan providers. What she found out may shock you. The outstanding balances from the seven largest private loan lenders make up about 6 percent of all outstanding student loan debt. What this means is, private student loans account for about $90 billion, or 8 percent of the $1.1 trillion in outstanding student debt. If you have used private loans to further your education, it may be a good idea to consider the ramifications of using private student loans to fund your educational needs compared to Direct Loans from the Department of Education.

A private student loan comes from a third party, such as Wells Fargo or the Bank of North Dakota. There is no government involvement. If the borrower defaults on a private student loan, the borrower has few remedies but to refinance the loan at a higher rate, and for a longer duration, or attempt to discharge the debt in bankruptcy. However, the lender has the remedy to sue in a court of law to enforce its claim, which affords the lender much leverage in extracting payment from the borrower. The lender may get a civil judgment against the borrower and any cosigners on the loan by bring the borrower and the co-signer to court. Furthermore, the civil judgment allows the lender to garnish wages, levy bank accounts, and in Minnesota, this civil judgment becomes a lien against any and all land owned by the borrower in the county where the judgment is docketed.

A civil judgment in Minnesota lasts for 10 years, and can be renewed for another 10 years at the discretion of the lender. The lender has a 6-year time limit to file a civil judgment complaint with the court from the date of the last payment. If the lender fails to get a judgment against the borrower within the 6-year period, the borrower may raise a “statute of limitation defense” preventing the lender from obtaining a civil judgment. With regards to bankruptcy in Minnesota, the courts do not use the Brunner Test to determine dischargeability as some parts of the county like the Second Circuit does. The Minnesota courts use the totality of the circumstances test to determine whether the borrower may have a discharge. The specific requirements of the totality of the circumstances test are a high bar to surmount and beyond the scope of this blog.

Another limitation on the use of private student loans is federal loan consolidation. A private loan cannot be consolidated into a Direct Consolidation Loan offered by the Department of Education to lower the borrower’s monthly payment. This means the borrower has to write two checks instead of one check to pay his or her educational loan. Next, unlike Direct Loans which may offer loan forgiveness to the borrower in certain specific situations, private loans do not. Private loans can be compared to a home mortgage; the monthly payments are defined if the loan has a fixed rate and payments are made for a fixed period of time. Unlike a conventional home mortgage for a home which may be discharged in bankruptcy if the home is surrendered, a private student loan cannot unless the lender fails to enforce its rights through a civil judgment, or the borrower wins on the merits of the totality of the circumstances test argument in court. Based on the differences in original terms and consequences for nonpayment, it is wise to use private student loans sparingly in financing your educational needs.

To find out more about student loan help for Minnesotans, contact Hedervare Law Office. Call 651-383-4725 now to schedule an analysis of your situation.

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