When many of us think of student loans, we think of federal debt — and for good reason. Almost $1.3 trillion of the $1.44 trillion in outstanding U.S. student loan debt is held in the federal portfolio.
The remaining $140 billion is made up of private student debt. Sometimes called alternative student loans, this type of debt carries several pros and cons when compared to federal loans.
Before you take out any debt, make sure you’re making the right decision. Learn the possible benefits and drawbacks of alternative student loans before you forge ahead.
3 helpful pros of alternative student loans
When it comes to private student loans, there are some key advantages. You might be surprised at what you can get if you move away from federal student loans.
1. 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 excellent credit. You may find rates starting as low as 2.55%. Current federal student loan rates are higher, especially if you are going to graduate school.
2. Higher borrowing limits
In many cases, alternative student loans come with higher borrowing limits than federal debt. If you’re going to a pricey private 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 $57,500 as an 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 percent 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 can be one way to make up the difference.
3. 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 eventually repay your loans. Your wages and tax refunds can even be garnished for your federal student loan debt.
With alternative student loans, however, there is 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.
Though defaulting on student loans is detrimental to your credit and rarely advisable, it may be comforting to know that there is an expiration date to private student loan default, should the worst happen.
5 serious cons of alternative student loans
While there are some real advantages to private student loans, they’re balanced by some definite drawbacks.
1. 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.
2. 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.
3. 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.
When you use private student loans, that’s not an option. 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.
4. 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. When I received my private student loan for grad school, I had to get a cosigner, even though I had a credit score above 700. The reason? I wouldn’t be working while in school.
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.
5. Private debt follows you to the grave
Since most federal student loans don’t require cosigners, your debt dies along with you. In fact, federal student loans won’t even count against your estate if you pass away.
With private student loans, however, lenders could try to collect against your estate. 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.
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 scholarship and federal loans, you may still need a private student loan to pay your way through school.
With a funding plan, you can get the education you want while limiting some of your exposure to borrowing risk.
Need a student loan?Here are our top student loan lenders of 2019!
|2 Important Disclosures for College Ave.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
(1)All rates shown include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
(2)This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with an 8-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 7% variable Annual Percentage Rate (“APR”): 96 monthly payments of $179.28 while in the repayment period, for a total amount of payments of $17,211.20. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
(3)As certified by your school and less any other financial aid you might receive. Minimum $1,000.
Information advertised valid as of 5/29/2019. Variable interest rates may increase after consummation.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
3 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
4 Important Disclosures for Discover.
5 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
©2019 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
* Offer valid for new Custom Choice Loans for which applications are submitted for a credit decision between 12:00:00am EST on June 1, 2019 and 11:59:59pm EST on August 31, 2019. A 0.50% interest rate reduction will be included in the loan options presented to an applicant during the online application process, upon passing the initial credit review. The interest rate reduction will be applied as of the first disbursement date and will be effective for the life of the loan.
6 Important Disclosures for LendKey.
7 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
8 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|3.99% – 11.98%2||Undergraduate, Graduate, and Parents|
|4.50% – 11.35%*,3||Undergraduate and Graduate|
|4.84% – 11.99%4||Undergraduate and Graduate|
|3.27% – 10.80%5||Undergraduate and Graduate|
|4.46% – 9.43%6||Undergraduate and Graduate|
|3.74% – 9.72%7||Undergraduate, Graduate, and Parents|
|3.99% – 11.64%8||Undergraduate, Graduate, and Parents|