8 Major Pros and Cons of Private Student Loans

 March 31, 2021
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If you need a student loan for college, your first choice should probably be federal loans, with their relatively low interest rates and flexible repayment plans. But you may need private student loans as well. Before you borrow, make sure to review the pros and cons of student loans from private lenders.

Pros and cons of student loans from a private lender

When it comes to private student loans, occasionally known as “alternative student loans,” there are both advantages and disadvantages to be aware of. Let’s take a look at some of these benefits and downsides, so you can have a full understanding of what it means to borrow a private student loan for school.

Pros

Cons

1. Pro: Rewards for excellent credit

With most types of federal student loans, your credit doesn’t matter. Your interest rate is set by Congress; everyone has the same rate, regardless of credit.

With private student loans, though, you can be rewarded if you have (or your cosigner has) excellent credit. As of the date of publishing, you may find rates starting below 3.4%. Current federal student loan rates are lower for undergraduates at 2.75%, but higher for graduate students, at 4.3% for unsubsidized Direct Loans or 5.3% for grad PLUS Loans.

2. Pro: Higher borrowing limits

In many cases, alternative student loans come with higher borrowing limits than federal debt. If you’re going to a pricey school, you might not be able to get the amount you need if you rely solely on federal student loans.

With federal student loans, your aggregate amount borrowed can be no more than $31,000 as a dependent undergraduate or $57,500 as an independent undergraduate. For graduate student loans, the cap is $138,500 — including what you already received as an undergrad.

Depending on your degree level, you can borrow up to 100% of your cost of attendance with alternative student loans. If you experience a “funding gap” because federal student loan caps restrict you, private student loans are one way to make up the difference.

3. Pro: Statute of limitations

When you default on your federal student loans, there is no statute of limitations. No matter what happens or how long your debt is in default, you have to repay your loans eventually. Your wages and tax refunds can even be garnished for your federal student loan debt.

One of the major pros of alternative student loans, however, is that there’s a statute of limitations when you default. The statute of limitations varies by state, ranging from three to 10 years. After this time, lenders have few options to collect from you.

Although defaulting on student loans is detrimental to your credit and rarely advised, it may be comforting to know that there is an expiration date to private student loan default, should the worst happen.

4. Con: Ineligible for income-driven repayment or federal forgiveness

With federal student loans, you can turn to income-driven repayment plans if you’re struggling to meet your monthly payments. These plans cap your loan payments at a small percentage of your income. Private student loans are ineligible for these plans.

While some private lenders offer financial hardship options like deferment or forbearance, it’s not the same thing as having your regular payment capped at a percentage of your income. On top of that, if you use private student loans, they won’t be eligible for federal forgiveness programs such as Public Service Loan Forgiveness (PSLF).

That said, you might be able to find a loan repayment assistance program from your state or employer that will help you pay off private student debt.

5. Con: Interest rates might be variable

Your federal student loan interest rates are fixed for the duration of the loan. They will never change, regardless of what happens in the national economy.

Though some alternative student loans also offer fixed rates, this isn’t always the case. Instead, you might find yourself with a variable rate.

If interest rates rise over time, so does your variable interest rate — and your monthly payment. Hybrid rates advertised by private lenders are a blend of fixed and variable rates and carry a similar risk.

Typically, you can choose between a fixed or variable rate when you borrow a private student loan.

6. Con: No federal subsidy

Depending on your loan type, some federal student loans come with an interest subsidy. If your debt is eligible, the government will pay your interest while you’re in school or even in repayment. Interest won’t accrue, saving you hundreds or thousands on your debt.

One of the cons of private student loans is that this option doesn’t exist. Interest begins accruing from day one, and in some cases, you might be required to make interest payments while you’re still in school. If you don’t pay the interest as you go along, it’s all added to your debt when you finish school.

7. Con: A cosigner may be necessary

Though most federal student loans don’t require a cosigner, you might need one for your private student loans — even if you have good credit. After all, you might not be working and earning an income while you’re enrolled.

A cosigner is legally responsible for your debt if you’re unable to repay it. If you miss a payment — or worse, default on your loans — your cosigner’s credit will be damaged and collectors can go after them for payment.

8. Con: Private debt isn’t always discharged after death

Federal loans are discharged if the borrower passes away. The debt will be cleared, and it won’t count against your estate.

With private student loans, however, lenders could try to collect against your estate in the event of death. While private student lenders can’t collect from relatives if the debt isn’t cosigned, they can still reduce the value of the inheritance you leave behind.

Plus, some private loans automatically go into default if your cosigner passes away, even if you’ve been keeping up with payments.

Start with federal student loans when possible

Even though alternative student loans come with some advantages, the reality is that many students are better off starting with federal student loans.

When funding your education, start by using your savings and applying for scholarships. Next, turn to federal student loans. Federal debt comes with protections and flexible repayment options that could be a financial lifesaver down the road.

Turn to private student loans when you can’t close your funding gap by other means. Even with scholarships and federal loans, you may still need a private student loan to pay your way through school.

If that’s the case, make sure you understand the pros and cons of student loans from a private lender before you borrow. Once you do, shop around and compare your options to find a loan with the best rate and terms for you.

Rebecca Safier and Andrew Pentis contributed to this report.

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