4 Surprising Times Private Student Loans Could Be Superior to Federal Ones

private student loans

When it comes to student loans, conventional wisdom says to exhaust your federal options before you look to private lenders.

That’s because the Office of Federal Student Aid offers some unbeatable perks for borrowers, such as income-driven repayment plans and Public Service Loan Forgiveness.

But everyone’s situation is different, and there are some scenarios when private student loans are actually preferable to federal ones. That might be part of the reason why federal borrowing dropped by $17.8 billion between 2012 and 2017, while nonfederal lending rose by $3 billion.

If you’re a college student looking for funding, consider these four situations when a private student loan could be beneficial.

1. You qualify for low private student loan rates

When it comes to choosing a student loan, one major priority should be finding a low interest rate.

Federal student loans tend to have some of the lowest rates, and they stay the same over the life of the loan. Direct Loans for undergrad borrowers, for example, come with an interest rate of 4.45%. PLUS Loans, which are offered to parents, have a higher fixed rate of 7.00%.

Private student loan rates, however, vary by lender, and each lender offers a range of rates. Citizens Bank, for example, offers private student loan rates of 5.25% - 11.99%. And College Ave student loans have rates of 6.07% - 12.66%.

The rate you get depends on your creditworthiness. If you have poor credit, you might not qualify without a cosigner. But if you have decent credit, you could get approved — and get a low interest rate to boot.

In fact, you could snag an interest rate even lower than one on a federal loan. Over the years, even a small reduction in interest could save you lots of money.

For example, let’s say you took out a federal student loan of $35,000 at 7.00% interest. Over 10 years of repayment, you’d pay $13,766 in interest.

But if you could find that loan from a private lender with an interest rate of 5.00%, you’d pay $9,548 over 10 years. That small reduction in interest saves you $4,218 over the life of your loan.

Before choosing a federal loan over a private one, apply for a rate quote from a few different private lenders. This rate quote is almost instant, and it won’t hurt your credit at all.

If you prequalify for a low rate, a private student loan might be the way to go.

2. You have a creditworthy cosigner

If you’re a college student, you might not have the financial credentials to qualify for a private student loan on your own. You probably don’t have a long credit history, and you might not have a steady income.

If that’s the case, you could still apply for a private loan, but you might need a cosigner. According to data firm MeasureOne, almost 94 percent of undergrad student loans during the 2015-2016 school year were issued with a cosigner.

A cosigner, usually a parent or other trusted relative, assumes responsibility for your debt. If you can’t make your payments, your cosigner must repay it instead. Not only does a cosigner improve your chances of getting approved, but their support could also help you snag a lower interest rate.

If you’re interested in exploring this option, speak with your parents to see if they’re comfortable being on the hook for your debt. If you come up with a repayment plan you both agree to, you could save money by borrowing from a private lender instead of the federal government.

3. Your private lender offers cosigner release

Although private lenders aren’t typically as flexible as the federal government when it comes to repayment, some do offer one promising benefit: cosigner release. If you make on-time payments, the lender might eventually remove your cosigner’s name from the loan.

College Ave, for example, offers cosigner release after you’re more than halfway through your repayment period. You also need to have made on-time payments for the previous 24 months.

Not only could this help your parents breathe easier, but it might make a private student loan preferable to a Parent PLUS Loan. Parent PLUS Loans are federal loans for parents whose child is in college. Unless you refinance a Parent PLUS Loan under your name, it’ll stay in your parent’s name.

Parent PLUS Loans have a fixed interest rate of 7.00% and an origination fee of 4.264 percent. Since some private lenders offer lower rates, no origination fees, and cosigner release, a private student loan might be less expensive (and less binding) than a Parent PLUS Loan.

Again, shopping around for a rate quote and comparing it with a similar federal student loan will help you determine which option is better for you.

4. You’ve hit your federal borrowing limit

In some cases, private student loans for students are better than federal ones. In other cases, they’re your only option.

The Office of Federal Student Aid sets annual borrowing limits for students. Though your exact limit might vary based on your specific situation, these are the current limits for many undergraduates:

  • Year one: $5,500, of which no more than $3,500 is in subsidized loans
  • Year two: $6,500, of which no more than $4,500 is in subsidized loans
  • Year three and beyond: $7,500, of which no more than $5,500 is in subsidized loans

If you need additional funding, you might not be able to take out any more Direct Loans. In this case, private student loans for students can come in handy.

Remember to explore your other options for funding too, such as getting a part-time job or applying to scholarships. When it comes to debt, a good rule of thumb is to take on as little as possible.

Compare private vs. federal loans before signing on the dotted line

Students are graduating with more debt than ever before — an average of $37,172 — and many struggle to pay it back. Before taking out student loans, it’s important to research all of your options so you can choose the best one.

When comparing federal student loans with private ones, consider factors such as interest rates, origination fees, and repayment plans. Find out about cosigner requirements, along with the possibility of eventual cosigner release.

In some scenarios, the benefits of private student loans could outweigh those of federal ones. But you’ll need to consider all the pros and cons of private student loans for students before deciding.

Plus, make sure you do everything you can to avoid taking on too much student debt before graduation.

Need a student loan?

Here are our top student loan lenders of 2018!
LenderRates (APR)Eligibility 

1 = Citizens Disclaimer.

2 = CollegeAve Autopay Disclaimer: 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.
3.46% -
Undergraduate, Graduate, and ParentsVisit Citizens
2.93% -
Undergraduate, Graduate, and ParentsVisit CommonBond
3.79% -
Undergraduate, Graduate, and ParentsVisit CollegeAve
4.19% - 9.69%Undergraduate and GraduateVisit LendKey
3.35% - 10.89%Undergraduate and GraduateVisit Connext
3.25% - 11.85%Undergraduate and GraduateVisit SallieMae
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