Parents funded 31% of college costs for their children in the 2016 to 2017 school year, according to Sallie Mae’s comprehensive look at How America Pays for College. While most of this cash came from savings, parents borrowed money to pay around 8% of costs associated with college for their kids.
Parents who are taking out loans for a child’s college education, or who are helping their children borrow money, need to understand the different types of loans available. In particular, it’s important for parents to understand the differences between private student loans and federal loans for college.
This guide will help parents find out the answers they need, including answering questions such as what is a private student loan and when should students and parents take out private loans for college.
What is a private student loan?
Understanding the definition of private loans is the first key step when deciding how to borrow for school.
A private student loan is a loan offered by financial institutions including banks, credit unions, and online lenders such as Sallie Mae, Citizens Bank or LendKey.
Private student loans are distinct from a federal student loan, which must be offered through the Department of Education. Private student loans do not have the advantages federal loans have. As the Department of Education explains, some of the key differences between private and federal loans include the following:
- Many private loans require repayment while students are in school. When students take out federal loans, repayment doesn’t begin until after graduation or until a student is no longer attending school at least half the time.
- Federal loans have fixed interest rates. Private student loans might have variable interest rates, which means interest and payments can fluctuate up or down.
- While private student loan interest rates vary based on your creditworthiness and other factors, the interest rate for federal loans is often lower than the interest rate for private loans.
- Undergraduate students might be eligible for subsidized student loans, which means the government pays interest costs as long as the student is going to school at least half the time. There are no subsidized private loans.
- Most federal student loans, except for PLUS Loans, don’t require a credit check. Private student loans require a credit check and students and parents could be denied loans for bad credit. Credit also impacts loan rates for private loans, but does not impact loan rates for federal loans.
- Students do not need cosigners for federal loans, but typically require cosigners for private loans.
- Federal loans can be consolidated into a Direct Consolidation Loan, but private student loans cannot.
- Federal loans offer forbearance and deferment, while most private loans provide limited or no help to students facing financial difficulties.
- Federal loans offer more flexibility in repayment than most private loans, including options for income-driven repayment plans.
- Federal loans have origination fees of 1.066% for Direct Subsidized Loans and Direct Unsubsidized Loans and 4.264% for PLUS Loans for loans distributed on or after Oct. 1, 2017, and before Oct. 1, 2018. Origination fees for private loans vary by lender.
- Loan forgiveness is possible for qualified borrowers with federal loans who work in public service, but private lenders don’t offer loan forgiveness.
Private loans do serve an important purpose. If students have exhausted limits on the amount of federal funding they can receive, either parents or students might take out private loans to pay for any additional costs of attending an academic program.
Are private loans for college the best choice?
Because of the significant benefits of federal student loans, students should exhaust all federal loans before considering private loans. Even if parents want to help children pay for college, if they must borrow money to do it, students should take out federal loans first. Parents can simply repay the federal loans their children have taken out if they want to help them.
Once federal loans for students are exhausted, primary options for funding college include:
- Private student loans for students
- Private student loans for parents
- Parent PLUS Loans through the federal government
Many parents find private loans to be cheaper than PLUS loans, in part because federal PLUS Loans have loan origination fees while many private lenders don’t charge origination fees. Many private lenders also offer more competitive rates to parents with good credit scores.
However, comparing interest rates and loan terms is key so parents can get the best overall deal. Parents should compare rates on each different type of loan available, including PLUS loans and private loans for students or parents. Consider interest, origination fees, the repayment term, and total cost of repayment as you decide which loans make the most sense.
Who can take out private student loans?
If you’ve decided private loans are a good choice, it’s important to be aware that students may not be able to qualify for private loans on their own. Because of credit score and income requirements, students often need a parent cosigner to be able to take out private loans. If a parent cosigns for a child, he or she is assuming responsibility for the loan and will be held responsible by the lender if the child doesn’t pay or is late with payments.
Because many lenders offer cosigner release, which allows a parent to be taken off a loan after a history of on-time payments are made, it might be preferable for students to take private loans in their own names so parents do not have to be responsible for the entire life of the loan. If parents take out a private student loan directly, they are fully responsible throughout the life of the loan unless the child is able to refinance the loan into his or her own name.
In addition to income and credit requirements, many private lenders have other eligibility criteria as well. For example, SoFi limits private student loans for parents only to parents or legal guardians. Other relatives cannot take out these loans to help students in their family. However, other relatives can cosign for students who are taking out private loans if the students take out the loans in their own names.
Lenders also typically require parents or students who are taking out private loans to be U.S. citizens or lawful permanent residents with a permanent address in the United States.
Helping your child with private loans for college
Parents can help their children by cosigning for private loans or by taking out private loans for parents. You can find a list of private loan lenders in our marketplace, along with details about the loan products they each provide. However, parents can also provide important assistance to make sure students don’t borrow more than is absolutely necessary.
It can be difficult to repay private student loans because of their relatively high costs compared with many federal loans. Parents should work with students to create a reasonable budget for school that covers the necessities while limiting, as much as possible, the number of private loans that anyone in the family must take out to fund a student’s education.
Need a student loan?Here are our top student loan lenders of 2018!
|1 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or Nationwide Bank, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Information advertised valid as of 11/1/2018. Variable interest rates may increase after consummation.
2 Important Disclosures for Discover.
3 Important Disclosures for Ascent.
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.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
* 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.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for PNC.
PNC Bank is one of the nation’s largest education loan providers. For over 40 years, PNC has been committed to helping students and their families make possible the adventure of college.
6 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.
SunTrust Bank, Member FDIC. ©2018 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
7 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
8 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.
9 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|3.94% – 12.78%1||Undergraduate, Graduate, and Parents|
|4.06% – 13.06%3||Undergraduate and Graduate|
|4.34% – 12.99%2||Undergraduate and Graduate|
|4.25% – 11.10%*,4||Undergraduate and Graduate|
|5.03% – 11.23%5||Undergraduate and Graduate|
|4.12% – 13.13%6||Undergraduate and Graduate|
|5.62% – 10.01%7||Undergraduate and Graduate|
|3.93% – 9.81%8||Undergraduate, Graduate, and Parents|
|4.26% – 12.13%9||Undergraduate, Graduate, and Parents|