With roughly 44 million Americans tackling student loan debt today, it’s important for borrowers to have all the information they need before making important financial decisions.
Although the Department of Education is a go-to resource for federal student loans, the information it provides about private student loans can lack context.
We’ve provided additional clarification on the following three private student loan risks listed on StudentAid.gov.
1. ‘Many private student loans require payments while you are still in school’
When you take out a federal student loan, your debt is put on the 10-year Standard Repayment Plan. You can switch repayment plans for your federal loan when you leave school and begin making monthly payments on it.
Alternatively, most private lenders allow you to choose a repayment plan when you take out a private student loan, not when you begin repayment. Although you could begin making payments while you’re enrolled, you don’t have to.
- Defer your student loan payments until six months after you leave school. Keep in mind, your loan accrues interest while you’re in school.
- Make a flat monthly payment of $25 toward accruing interest while you’re in school. You make full student loan payments after you graduate.
- Make interest-only payments on your student loan while you’re in school, then make full payments after graduation.
- Make full payments toward interest and the loan’s principal amount while you’re in school and after graduation.
The chief benefit of making in-school payments is that you’ll pay less over time to clear your student loan debt.
If you choose a six-month deferment on a $20,000 loan with a 5.70% interest rate, for example, you would add $568 of interest to the balance of your loan. Plug your loan information into our student loan deferment calculator to see how much you could save via in-school payments.
It’s possible that you’ll run into a lender that doesn’t offer in-school deferment. But you should have options when it comes to repaying your debt. Focus on lenders that offer repayment plans that work best for your financial situation.
2. ‘Private student loans can have variable interest rates, some greater than 18.00%’
Federal student loans only come with fixed interest rates. That means your interest rate won’t change for the life of the loan. If you refinance your student loans at a later date, however, your rate is liable to change.
Private student loans offer borrowers a choice between fixed and variable interest rates. Variable interest rates can increase or decrease during repayment according to metrics like the London Interbank Offered Rate (LIBOR). Most reputable lenders use LIBOR to adjust variable rates. Check with your lender about how it determines its rates.
Like fixed rates, variable rates are awarded by private lenders according to your or your cosigner’s credit history. Your debt-to-income ratio and other financial factors might also be considered. Lower rates are generally given to borrowers with higher credit scores.
It’s possible you could be quoted a variable interest rate as high as 18.00% by a private lender. But being quoted such a high rate should ring alarm bells in your head. You’re either in need of a cosigner or might be a better fit for a federal loan, which wouldn’t require a credit check.
Also, make sure you consider lenders’ interest rate caps before taking out a loan. A rate cap determines how high your variable rate is allowed to go. At College Ave, variable interest rates range between 3.99% – 11.32% and the cap is 25.00%.
But even if you took out a loan with an 11.52% interest rate, it’s unlikely your rate would rise to 18.00%. Over the last three decades, the largest one-month LIBOR increase over a 10-year period was 4.29%, according to Macrotrends. It took over two years, between May 2004 and July 2006, for that increase to occur.
3. ‘You may need a cosigner’ for private student loans
You don’t need a cosigner for Direct Subsidized or Unsubsidized Loans from the federal government. The Department of Education only considers credit history when handing out Direct PLUS Loans.
Your parent must pass a credit check to take out a Parent PLUS Loan. If you’re a graduate student, you’d need to do the same to receive a Graduate PLUS Loan.
Similar to how a cosigner could help you score a better rate on a private loan, an endorser could help you qualify for a PLUS Loan if you have an adverse credit history. An endorser, like a cosigner, would agree to repay the loan if you’re unable to.
Since private lenders award interest rates based on credit, 93% of undergraduate student loans are cosigned, according to a 2017 MeasureOne report. So if you’re an undergraduate considering private student loans, you’ll almost certainly need a cosigner.
If you’re a graduate student, you might not need a cosigner if you’ve developed a solid credit history. About 60% of graduate students had their loans cosigned during the 2016-2017 academic year.
Study the differences between federal and private student loans
In its side-by-side comparison of loan types, the Department of Education helps prepare you for the worst-case scenarios of private student loans. It’s making the case that federal loans are the safer way to go. Plus, the government offers some features, such as student loan forgiveness, that private lenders can’t match.
Although the worst-case scenario is possible for private student loans, it’s not probable if you’re a well-qualified borrower taking the time to look for the right lender.
Learn when to prioritize private loans over federal loans. For example, it might make sense to choose a private student loan with competitive interest rates if you’re:
- An undergrad with a creditworthy cosigner
- An older professional returning to school
- A graduate or professional student expecting to earn a high salary
For a more comprehensive comparison between federal and private student loans, check out our ultimate guide to private student loan borrowing.
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 5/22/2019. 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.
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% – 11.32%2||Undergraduate, Graduate, and Parents|
|4.50% – 11.35%*,3||Undergraduate and Graduate|
|4.84% – 13.49%4||Undergraduate and Graduate|
|4.25% – 11.30%5||Undergraduate and Graduate|
|4.50% – 9.47%6||Undergraduate and Graduate|
|3.74% – 9.72%7||Undergraduate, Graduate, and Parents|
|4.45% – 12.32%8||Undergraduate, Graduate, and Parents|