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A group of people climbing a mountain, but the last person is further behind because s/he is holding a gigantic graduation cap.
Kiersten Essenpreis for Money

In April 2020, Tracy Baumann’s employer notified her that she, along with all other managers and directors, would be forced to take a temporary 20% pay cut due to the coronavirus pandemic. The news didn’t bode well for her efforts managing the $80,000-plus worth of private student loans she’s still paying off nearly two decades after completing her bachelor’s degree.

The financial burden is so heavy that Baumann, a marketing director based in Greensboro, North Carolina, says she can’t even log in and look at her account without experiencing severe anxiety.

“Last time I ran the numbers, my original loan amount was $55,000,” she says. “I have since paid $39,000 in payments, and yes, I still owe over $80,000 thanks to compounding interest and forbearance.”

Baumann’s student debt comes from a combination of two different types of federal loans and private loans, which consumed most of her paycheck even before the pandemic. While one federal loan has remained in automatic forbearance since the start of the pandemic, the payments on her privately-held loans “kept coming with no break.”

It’s a story that’s been all too common over the past year for the approximately 9 million Americans whose debt is ineligible for the penalty-free forbearance period given to most federal borrowers.

Based on the amount of headlines about extending the current student loan relief period and debates over cancelling student debt, you might think that all borrowers have been enjoying an unprecedented break from making payments while they wait for their debt to be wiped out. But the "student debt" in those cases doesn't actually include all student loans or borrowers.

Outstanding debt from private student loans, along with Perkins loans and Federal Family Education Loans — both of which fall under the gray area of federally guaranteed but privately held loans — makes up approximately $263 billion of the $1.7 trillion total amount owed in the U.S. Almost none of it has been eligible for federal relief.

How private borrowers got left out

After multiple extensions of provisions in the CARES Act, it currently stands that federal borrowers will not be required to make a single payment toward their debts until October 2021.

Yet while the way federal student loans are treated is controlled by Congress and the Department of Education, private borrowers are at the mercy of independent regulators who set the standards for all consumer debt from mortgage loans to credit cards. Even under usual circumstances, private student loan borrowers have had fewer options than federal borrowers for relief if they’re struggling to make ends meet. But the pandemic really laid bare those different realities.

“I’ve seen a lot of frustration and anxiety from private loan borrowers affected by [the pandemic],” says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors (TISLA).

Adding to the frustration, the terms and conditions of private student loans vary from state to state, lender to lender and even from one loan to another.

“Some lenders automatically lowered their whole portfolio’s interest rates. I saw others that stopped doing collections on people who didn’t make their payments,” Mayotte says. “Some weren’t offering any type of relief other than what they’d offer before."

Who are private student loan borrowers?

Advocates for student debt relief have noted that the typical person taking out both federal and private loans for school is a teenager or in their early 20s. Often, these borrowers have very little experience dealing with debt or the knowledge of how the loans may impact them down the road.

The limited data that exist on the private student loan market indicates borrowers are pretty evenly spread across class and ethnic backgrounds. But the data also show a stark contrast between who thrives and who falls into economic hardship.

A 2020 report from the Student Borrower Protection Center found that Black and Latino borrowers with private loans account for over 41% of non-repayment due to economic hardship despite representing only 20% of all private borrowers. Additionally, while students from the lowest income quartile account for less than 10% of borrowers, they make up 23% of delinquencies. By contrast, students from the highest income quartile make up the largest share of private borrowers at nearly 21% — and none of them have missed payments.

Baumann says she was “completely naive” about how student loans worked when she enrolled at Ringling College of Art + Design in Sarasota, Florida as a sophomore transfer student, having lived on her own while supporting herself as a waitress since she was a teenager.

When she was 17 years old, Baumann got into a major dispute with her father that ultimately led to her dropping out of high school and a period of estrangement from his side of the family. One year later, she completed her GED and started at a nearby community college with the goal of transferring to a four-year university. Upon her acceptance into the private arts college, her mind was set.

“I was sucked in. I was going to get my interior design degree, a great job, and pay the loans off no problem.” As is often the case, she says, that’s not how things worked out.

The discussion about financing her education was brief when Baumann visited the financial aid office: “They asked ‘Do your parents pay for school?’ ‘No, I’m independent, I pay for everything myself.’ ‘Okay, well you can take out what we call a signature loan, and it will pay for your college.’”

While she maintains that the financial aid officer was probably acting in good faith, Baumann now believes that private lending organizations like the one she’s now indebted to are predatory by design. “They had full knowledge of what they were doing.”

For Shawna Newman, owner of a boutique digital marketing agency, Skipblast Digital, in Las Vegas, strained family relationships also played a major role in her decision to take out private student loans.

“My parents basically disowned me when I came out after my second year of college, cutting off all financial support,” Newman says. “I was stuck paying out-of-state tuition and paying for a place to live while working a minimum wage fast food job part-time.”

Because she had to be self-reliant, it took Newman six years instead of four to graduate with her bachelor’s degree from the University of Central Florida. From her perspective at the time, the private loans didn’t seem any different than the ones she was eligible for through the federal FAFSA form.

“It didn't really seem like anything different from my regular Stafford loans,” Newman says. “Since I was familiar with the Stafford loans, I thought I knew what was going on.”

Newman still has nine years left of paying off the private loans. Knowing what she knows now, she would not have taken the private loan offer and instead says she would have stopped going to college until she had saved up enough money to pay without them.

What help is available for private student borrowers?

In the moment, it can be hard to grasp how the decisions you make as a teenager or young adult may come back to haunt you decades down the road, especially when some students lack access to the resources to make an informed decision. And it would have been downright impossible to have predicted the impact of a global pandemic on your future finances.

Both Baumann and Newman have been able to avoid falling into delinquency during the pandemic, but the financial strain and uncertainty still looms over them every day.

“I’ve never been able to save any kind of significant money because of my loan payments, even before the pay cut,” Baumann says. “It’s always been a struggle.”

For private borrowers who continue to face economic hardship in the wake of the pandemic, certain assistance programs may be available through their lenders — but it’ll take some extra effort on your end, advocates say.

“For the most part, I didn’t see a lot of advertising for relief available so the only way a borrower could know there was something that could help them, would be to reach out to the lender directly to ask,” Mayotte says.

The worst thing you can do is ignore or avoid the situation. Mayotte has stressed to borrowers that the most important thing is to stay in contact with their lenders, if not to access help then at the very least to remain in their good graces should you miss a payment. Most private lending institutions will offer some form of temporary relief, like a short-term period of lower interest rates or interest-only payments, but often only if you’ve already fallen behind.

There is also the option of refinancing your private loans, thanks to still-low interest rates. That may be especially convenient for those with high-interest private loans, who could see a significant reduction in their monthly payments by knocking a few percentage points off of their current interest rate.

While federal borrowers lose access to flexible repayment options when they refinance, that’s not the case for private borrowers. But there are still some caveats. Just like with mortgages and car loans, in order to get a better rate you need to meet certain criteria to qualify. Namely, a good credit score, strong credit history and a salary that can sustain the payments.

What does the future hold for private borrowers?

After President Biden was elected, conversations in Congress once again turned to the possibility of canceling student debt.

There have been a variety of proposals as to how much of the country’s student debt could be wiped out. But while lawmakers squabble over everything from who has the authority to wipe out debt to who would be eligible to the actual amount — the most common amounts currently being thrown around are $10,000 or $50,000 per person — there hasn’t been as much attention on how these proposals would address private borrowers.

According to Mayotte, the problem is that private loans aren’t connected to the federal government; to wipe out any principal amount “would be similar to a bank bailout.” A contentious and expensive move like a bailout is not likely to bode well in Congress. But there are still some moves lawmakers could accomplish that would provide relief for many private borrowers.

As it currently stands, private student loan holders are at the mercy of independent regulators. They don’t have access to key benefits that help federal borrowers in need of help like income-driven repayment plans or the nine-month grace period for late payments before they fall into default.

Instead, private student loans typically go straight into default as soon as you miss a payment; a situation that can negatively impact your credit score for years to come. Private lenders also have no legal obligation to help borrowers get their loans out of default: Typically after 120 days without payments, lenders will “charge off” the loan, transferring it to their in-house collections department or selling it to a collection agency. Either way, once a loan is charged off, it’s unlikely the original lender will work with you to get out of default — and you’ll still be on the hook for all of the money that’s owed.

But according to Mayotte, that doesn’t have to be the case. Lawmakers could, theoretically, create regulations that would treat private student loans as their own specific class of debt, eligible for more assistance options, rather than being lumped in with all other financial products.

“If they separated private student loans out of that bucket and passed legislation to encourage those regulators to allow the lenders to offer relief in certain circumstances, that would be helpful,” Mayotte says.

For the millions of borrowers who have continued to fork over sometimes thousands of dollars per month over the past year, any form of relief that could alleviate their financial distress would be welcome.

Newman says she has been fortunate to be able to make her $222 monthly payment as usual, but that she “can't help but feel a bit let down that private student loan borrowers were left out of this relief.”

She says that private student debt holders should be eligible for the same relief as their federal counterparts, especially because of the ways she believes lenders prey on young college students: “I feel like a lot of private student loan borrowers were snookered into these loans, no different than the people who ended up at scam universities.”

Baumann’s salary has since been fully reinstated to pre-pandemic levels. But that just means the burden of her monthly loan payment now is slightly lighter than it was during most of 2020. In the 16 years since she started paying off the loan, that burden has never truly been lifted.

“The joke is always ‘There’s our mountain house mortgage.’ I could make payments on a second mortgage with what I pay in student loans every month and there’s no end in sight,” says Baumann, who now worries about the future for her teenage son as he gets closer to applying for college. While she says she’s fortunate her fiancé makes a good salary to support their family, it still seems unlikely that she’ll be able to help pay for her son’s future tuition.

“I wish people would take the time to learn more about the situation, because you hear a lot of people saying ‘You took out the loan, you pay it back,’” she says. “But they don’t understand how the compounding interest affects the loan, and that’s the part that is so terribly unfair.”

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