Federal student loans can make paying for college more affordable and offer special borrower protections. But what happens when federal loan limits fall short of your cost of attendance?
In order to bridge the gap, you might need to consider taking out private student loans.
To help you understand the differences between the two loan types and the possible cons of private student loans, here are five factors to consider.
1. You’ll likely pay higher interest rates
Although you might find lower interest rates from private lenders such as Citizens Bank or College Ave, they’re typically variable interest rates, which can increase over time. Plus, you need to have great credit and a solid income — or at least a cosigner who does — to get the best rates private lenders offer.
As a result, when it comes to fixed interest rates, federal student loans are likely cheaper for student borrowers in the long run. Plus, federal student loans offer special borrower protections.
The Department of Education offers the following fixed interest rates on loans disbursed between July 1, 2017, and July 1, 2018:
|Loan Type||Borrower Type||Interest Rate|
|Direct Subsidized Loan||Undergraduate students||4.45%|
|Direct Unsubsidized Loan||Undergraduate students||4.45%|
|Direct Subsidized Loan||Graduate or professional students||6.00%|
|Direct PLUS Loan||Parents and graduate or professional students||7.00%|
2. You might not get approved on your own
If you don’t have any experience with credit or you’ve made some credit mistakes in the past, you’ll have a hard time getting approved for private student loans. Federal student loans, on the other hand, don’t require a credit check at all.
Having bad or no credit doesn’t mean an automatic denial, however. You can ask a parent or other trusted person to cosign a loan with you. If their credit and income meet the lender’s requirements, that can be enough to get approved.
That said, asking someone to cosign is no small request. By adding their name to the loan, your cosigner is equally responsible for the payments.
Also, the loan will show up on their credit report. So if you end up missing a student loan payment or going into student loan default, it could hurt both of you creditwise.
3. You won’t get access to income-driven repayment plans
Depending on how much student debt you end up with at graduation, making your monthly payment might be difficult.
With federal student loans, you can apply for an income-driven repayment (IDR) plan. These plans can lower your monthly payment based on your income level and family size. In turn, your student loan debt becomes more affordable and your cash flow increases for other expenses.
Private student lenders, however, typically don’t offer a way to lower your monthly payment. One exception is the Rhode Island Student Loan Authority, which offers an income-based repayment plan to eligible borrowers.
If you don’t think you’ll need to rely on an IDR plan for lower payments, then this federal student loan benefit might not be as important to you.
4. You might not qualify for student loan forgiveness
Student loan forgiveness programs for private student loans are rare. So if you plan to take on a lot of debt, federal student loans might be a better option.
You’ll have access to the Public Service Loan Forgiveness Program through the federal government as well as several other student loan forgiveness programs depending on your loan type and career plans.
Student loan forgiveness isn’t free, though. In most cases, you have to commit to a certain career path to qualify, and you might not want to tie yourself down. Also, forgiven debt can be taxable as income in the year your debt was canceled.
5. You’ll need to devote time to researching lenders
There are several private student loans out there, and it’s not always clear which one is the best. Private student loan companies often offer a range of interest rates you might qualify for, so there’s no way to know for sure what your rate will be without pre-qualifying or applying.
Private student loan companies can offer other features to consider. For example, some lenders allow you to apply to remove your cosigner from the loan after you meet certain requirements. Others, including Discover and SunTrust, offer a balance reduction if you get good grades or graduate.
This can make the process of applying for private loans for students daunting. But if you don’t have access to federal loans, you’ll want to shop around and compare several private student loans to make sure you get the best deal.
Compare private student loans with all borrowing options
If you need private student loans to get through college, they’re better than some alternatives. For example, personal loans and credit cards charge higher average interest rates than private student loans.
But compared to federal student loans, private student loans are likely more expensive and don’t offer as much flexibility with repayment.
As you consider your needs, also look for other ways to pay for college. The more you do to earn money to cover your college costs, the less student loan debt you’ll have to take on.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|