8 Major Pros and Cons of Private Student Loans

Written by Miranda Marquit

March 31, 2021March 31, 2021Paying for CollegeFeatured1232Miranda Marquit

Updated on March 31, 2021

Editorial Note: This content is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by the financial institution.

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Private Student Loan rates starting at 0.94% APR

	0.94% to 11.98% ¹ VARIABLE APR	Visit Lender
	1.13% to 11.23% ² VARIABLE APR	Visit Lender
	0.94% to 11.44% ³ VARIABLE APR	Visit Lender

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²Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.

³Rate range above includes optional 0.25% Auto Pay discount.

Variable APR

Learn more about private student loan lenders.

Note that the situation for student loans has changed due to the impact of the coronavirus outbreak and relief efforts from the government, student loan lenders and others. Check out our Student Loan Hero Coronavirus Information Center for additional news and details.

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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

Rewards for excellent credit
Higher borrowing limits
Statute of limitations

Cons

Ineligible for income-driven repayment or federal forgiveness
Interest rates might be variable
No federal subsidy
A cosigner may be necessary
Private debt isn’t always discharged after death

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.

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
	0.94% – 11.98%¹	Undergraduate Graduate	Visit College Ave
	1.13% – 11.23%²	Undergraduate Graduate	Visit SallieMae
	0.94% – 11.44%³	Undergraduate Graduate	Visit Earnest
	1.47% – 11.31%⁴	Undergraduate Graduate	Visit Ascent
	0.95% – 11.18%⁵	Undergraduate Graduate	Visit SoFi
	1.03% – 11.01%⁶	Undergraduate Graduate	VISIT CITIZENS
Learn more about private student loan lenders. Learn more about private student loan lenders.

¹

²Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.

³Rate range above includes optional 0.25% Auto Pay discount.

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Citizens Bank Disclosures

Undergraduate Rate Disclosure: Variable interest rates range from 1.03% – 11.01% (1.03% – 10.24% APR). Fixed interest rates range from 3.23% – 11.70% (3.23% – 10.83% APR).

Graduate Rate Disclosure: Variable interest rates range from 1.89% – 10.66% (1.89% – 10.41% APR). Fixed interest rates range from 4.64% – 11.23% (4.64% – 10.95% APR).

Business/Law Rate Disclosure: Variable interest rates range from 1.89% – 9.22% (1.89% – 8.50% APR). Fixed interest rates range from 4.24% – 9.74% (4.24% – 9.02% APR).

Medical/Dental Rate Disclosure: Variable interest rates range from 1.89% – 8.02% (1.89% – 7.72% APR). Fixed interest rates range from 4.18% – 8.54% (4.18% – 8.24% APR).

Parent Loan Rate Disclosure: Variable interest rates range from 1.97%-7.06% (1.97%-7.06% APR). Fixed interest rates range from 4.55%-7.58% (4.55%-7.58% APR).

Bar Study Rate Disclosure: Variable interest rates range from 4.44% – 9.58% (4.44% – 9.52% APR). Fixed interest rates range from 7.39% – 12.94% (7.39% – 12.82% APR).

Medical Residency Rate Disclosure: Variable interest rates range from 3.53% – 7.03% (3.53% – 6.75% APR). Fixed interest rates range from 6.99% – 10.49% (6.97% – 10.08% APR).

IS Variable Rate Disclosure: Variable Rates advertised are 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 of December 1, 2021, the one-month LIBOR rate is 0.09%. Variable interest rates will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree and presence of a co-signer. Your final variable rate may be based upon the 30-day average SOFR index, as published by the Federal Reserve Bank of New York. The maximum variable rate is the greater of 21.00% or Prime Rate plus 9.00%.

ERL Variable Rate Disclosure: Variable interest rates are based on the 30-day average Secured Overnight Financing Rate (“SOFR”) index, as published by the Federal Reserve Bank of New York. As of December 1, 2021, the 30-day average SOFR index is 0.05%. Variable interest rates will fluctuate over the term of the loan with changes in the SOFR index, and will vary based on applicable terms, level of degree and presence of a co-signer. The maximum variable interest rate is the greater of 21.00% or the prime rate plus 9.00%.

Fixed Rate Disclosure: Fixed rate ranges are based on applicable terms, level of degree, and presence of a co-signer.

Lowest Rate Disclosure: Lowest rates are only available for the most creditworthy applicants, require a 5-year repayment term, immediate repayment, a graduate or medical degree (where applicable), 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. Rates are subject to additional terms and conditions, and are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.

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. Borrowers should carefully review federal benefits, especially if they work in public service, are in the military, are considering possible loan forgiveness options, 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. 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 on our website 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.

Eligibility Criteria: Applicants must be a U.S. citizen, permanent resident, or eligible non-citizen with a creditworthy U.S. citizen or permanent resident co-signer. For applicants who have not attained the age of majority in their state of residence, a co-signer is required. Citizens Bank reserves the right to modify eligibility criteria at any time. Citizens Bank private student loans are subject to credit qualification, completion of a loan application/Promissory Note, verification of application information, and if applicable, self-certification form, school certification of the loan amount, and student’s enrollment at a Citizens Bank participating school.

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.

8 Major Pros and Cons of Private Student Loans

Private Student Loan rates starting at 0.94% APR