8 Major Pros and Cons of Private Student Loans

Miranda Marquit

Updated on February 13, 2020

February 13, 2020February 13, 2020Paying for CollegeFeatured1082Miranda Marquit

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Check out our top picks below or learn more about other ways to pay for college.

	2.75% to 10.65% APR¹	Visit Lender
	2.69% to 10.97% APR²	Visit Lender
	2.80% to 11.37% APR³	Visit Lender

¹Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.

²

³ Discover's lowest variable rates shown are for the undergraduate loan and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments.

Variable APR

Learn more about private student loan lenders.

When many of us think of student loans, we think of federal debt — and for good reason. About $1.4 trillion of the $1.56 trillion in outstanding U.S. student loan debt is held in the federal portfolio. The remaining $121 billion was lent by banks, credit unions and online lenders. There are lots of pros and cons of these private student loans, also known as alternative student loans.

Before you borrow any education debt, make sure you’re making the right decision. Learn the advantages and disadvantages of alternative student loans before you forge ahead.

3 Pros of alternative student loans
5 Cons of alternative student loans
Start with federal student loans when possible

3 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. As of the date of publishing, you may find rates starting below 3.00%. 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% 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 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.

Though 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.

5 Cons of alternative student loans

While there are some real pros of 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. Hybrid rates advertised by private lenders are a blend of fixed and variable rates and carry a similar risk.

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.

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.

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. 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.

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 scholarships 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.

Andrew Pentis contributed to this report.

Need a student loan?

Check out our top picks below or learn more about other ways to pay for college.

Lender	Variable APR	Degrees That Qualify	More Info
	2.75% – 10.65%¹	Undergraduate Graduate	Visit SallieMae
	2.69% – 10.97%²	Undergraduate Graduate	Visit College Ave
	2.80% – 11.37%³	Undergraduate Graduate	Visit Discover
	3.52% – 9.50%⁴	Undergraduate Graduate	Visit CommonBond
	5.20% – 14.18%⁵	Undergraduate Graduate	Visit Ascent
	2.72% – 10.98%⁶	Undergraduate Graduate	VISIT CITIZENS
Learn more about private student loan lenders. Learn more about private student loan lenders.

Ascent Student Loans Disclosures

Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.

Variable rate loans are based on a margin between 1.90% and 13.50% plus the 1-Month London Interbank Offered Rate (LIBOR) rounded to the nearest 1/100th of a percent. The current LIBOR is 1.629%, which may adjust monthly. Your interest rate may increase or decrease, based on LIBOR monthly changes, resulting in an Annual Percentage (APR) range between 3.14% and 11.88%. Fixed rate loans have an APR range between 4.09% and 13.03% based on your credit worthiness and your selected program. Competitive variable rates calculated monthly at the time of loan approval. Rates are effective as of 03/01/2020 and reflect an Automatic Payment Discount of 0.25% on the lowest offered rate and a 2.00% discount on the highest offered rate. Automatic Payment Discount is available if the borrower is enrolled in automatic payments from their personal checking account and the amount is successfully withdrawn from the authorized bank account each month. (See Automatic Payment Discount Terms & Conditions.)
Payments may be deferred. Subject to lender discretion, forbearance and/or deferment options may be available for borrowers who are encountering financial distress.
Making interest only or partial interest payments while in school will not reduce the principal balance of the loan. There are three (3) flexible in-school repayment options that include fully deferred, interest only and $25 minimum repayment.
Flexible repayment plans may be offered up to a fifteen (15) year repayment term for a variable rate loan and ten (10) year repayment term for a fixed rate loan. Students must be enrolled at least half-time at an eligible school. Minimum loan amount is $2,000.
Interest rate reduction of 0.25% for enrollment in automatic debit applies only when the borrower and/or cosigner signs up for automatic payments and the regularly scheduled, current amount due (including full, flat, or interest only payments, as applicable) is successfully deducted from the designated bank account each month. Interest rate reduction(s) will not apply during periods when no payment is due, including periods of In-School, Deferment, Grace or Forbearance. If you have two (2) returned payments for Nonsufficient Funds, we may cancel your automatic debit enrollment and you will lose the 0.25% interest rate reduction. You will then need to re-qualify and re-enroll in automatic debit payments to receive the 0.25% interest rate reduction.
All applicants (individual and cosigner) are required to complete a brief online financial literacy course as part of the application process to be eligible for funding.
Eligibility, loan amount and other loan terms are dependent on several factors, which may include: loan product, other financial aid, creditworthiness, school, program, graduation date, major, cost of attendance and other factors. Aggregate loan limits may apply. The cost of attendance is determined and certified by the educational institution.
The legal age for entering into contracts is eighteen (18) years of age in every state except Alabama where it is nineteen (19) years old, Nebraska where it is nineteen (19) years old (only for wards of the state), and Mississippi and Puerto Rico where it is twenty-one (21) years old.
1% Cash Back Graduation Reward subject to terms and conditions. Click here for details. In order to be eligible for the 1% Cash Back Graduation Reward, borrower must meet the following criteria after graduation:
- The student borrower has graduated from the degree program that the loan was used to fund.
- The student borrower may change majors and/or transfer to a different school, but must obtain the same level of degree (e.g. – undergraduate or graduate)
- The graduation date is more than 90 days and less than five (5) years after the date of the loan’s first disbursement.
- Any loan that the student has borrowed under the Ascent loan is not more than 30-days delinquent or in a default status as of the graduation date and until any Graduation Reward is paid.
Students can apply to release their cosigner and continue with the loan in only their name after making the first 24 consecutive regularly scheduled full principal and interest payments on-time and meeting the other eligibility criteria to qualify for the loan without a cosigner.

* Application times vary depending on the applicant’s ability to supply the necessary information for submission.

⁶

Citizens Bank Disclosures

Undergraduate Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As March 1, 2020, the one-month LIBOR rate is 1.62%. Variable interest rates range from 2.72% – 10.98% (2.72% – 10.83% APR) and will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. Fixed interest rates range from 4.72% – 12.19% (4.72% – 12.04% APR) based on applicable terms, level of degree earned and presence of a co-signer. Lowest rates shown requires application with a co-signer, are for eligible applicants, require a 5-year repayment term, borrower making scheduled payments while in school and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens One is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of the loan.

Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans and replace those with the benefits of the Education Refinance Loan. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision at http://www.citizensone.com/EdRefinance, including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.

Citizens One Student Loan Eligibility: Borrowers must be enrolled at least half-time in a degree-granting program at an eligible institution. Borrowers must be a U.S. citizen or permanent resident or an international borrower/eligible non-citizen with a creditworthy U.S. citizen or permanent resident co-signer. For borrowers who have not attained the age of majority in their state of residence, a co-signer is required. Citizens One reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Citizens One Student Loans private student loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, and if applicable, self-certification form, school certification of the loan amount, and student’s enrollment at a Citizens One Student Loans-participating school.

Please Note: International Students are not eligible for the multi-year approval feature.

Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.

Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.