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

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

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.

private student loans
Logo

We’ve got your back! Student Loan Hero is a completely free website 100% focused on helping student loan borrowers get the answers they need. Read more

How do we make money? It’s actually pretty simple. If you choose to check out and become a customer of any of the loan providers featured on our site, we get compensated for sending you their way. This helps pay for our amazing staff of writers (many of which are paying back student loans of their own!).

Bottom line: We’re here for you. So please learn all you can, email us with any questions, and feel free to visit or not visit any of the loan providers on our site. Read less

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 5.47% – 12.19%. And College Ave student loans have rates of 4.72% – 12.94%.

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 2019!
LenderVariable APREligibility 
* 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.

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

2 Important Disclosures for Earnest.

Earnest Disclosures

  1. Rates include 0.25% Auto Pay Discount
  2. Explanation of Rates “With Autopay” (APD)
    Rates shown include 0.25% APR discount when client agrees to make monthly principal and interest payments by automatic electronic payment. Use of autopay is not required to receive an Earnest loan.

    Available Terms
    For Cosigned loans – 5, 7, 10, 12, 15 years. 
    Primary Only – 10, 12, 15 years

    In school deferred payment is not available in AL, AZ, CA, FL, MA, MD, MI, ND, NY, PA, and WA).


3 Important Disclosures for College Ave.

CollegeAve Disclosures

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 a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. 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 7/1/2019. Variable interest rates may increase after consummation.


4 Important Disclosures for Discover.

Discover Disclosures

  1. Students who get at least a 3.0 GPA (or equivalent) qualify for a one-time cash reward on each new Discover undergraduate and graduate student loan. Reward redemption period is limited. Please visit DiscoverStudentLoans.com/Reward for any applicable reward terms and conditions.
  2. View Auto Reward Debit Reward Terms and Conditions at DiscoverStudentLoans.com/AutoDebitReward.
  3. Aggregate loan limits apply.
  4. The interest rate ranges represent the lowest and highest interest rates offered on Discover student loans, including Undergraduate, Graduate, Health Professions, Law and MBA Loans. The fixed interest rate is set at the time of application and does not change during the life of the loan. The variable interest rate is calculated based on the 3-Month LIBOR index plus the applicable Margin percentage. The margin is based on your credit evaluation at the time of application and does not change. For variable interest rate loans, the 3-Month LIBOR is 2.50% as of July 1, 2019. Discover Student Loans will adjust the rate quarterly on each January 1, April 1, July 1 and October 1 (the “interest rate change date”), based on the 3-Month LIBOR Index, published in the Money Rates section of the Wall Street Journal 15 days prior to the interest rate change date, rounded up to the nearest one-eighth of one percent (0.125% or 0.00125). This may cause the monthly payments to increase, the number of payments to increase or both. Please click https://www.discover.com/student-loans/interest-rates.html
    for more information about interest rates

5 Important Disclosures for CommonBond.

CommonBond Disclosures

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.
If you are unable to pay your government loan, the government can refer your loan to a collection agency or sue you for the unpaid amount. In addition, the government has special powers to collect the loan, such as taking your tax refund and applying it to your loan balance.

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 you refinance your government loan, your new lender will use the proceeds of your new loan to pay off your government loan. Private student loan lenders do not have to honor any of the benefits that apply to government loans. Because your government loan will be gone after refinancing, you will lose any benefits that apply to that loan. If you are an active-duty service member, your new loan will not be eligible for service member benefits. Most importantly, once you refinance your government loan, you will not able to reinstate your government loan if you become dissatisfied with the terms of your private student loan.

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 are a borrower with a secure job, emergency savings, strong credit and are unlikely to need any of the options available to distressed borrowers of government loans, a refinance of your government loans into a private student loan may be attractive to you. You should consider the costs and benefits of refinancing carefully before 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.


6 Important Disclosures for PNC.

PNC Disclosures

  1. Annual Percentage Rates (APRs): APRs from 4.52% to 11.11% are for the fully deferred repayment option, include the 0.50% interest rate discount for automatic payment and encompass the full range of APRs for the three repayment term options (5, 10 and 15 year). APRs within this range may vary based on the repayment term chosen. See break down of APR ranges by repayment terms below.
  2. Fixed Annual Percentage Rates (APRs): APRs range from 4.52% to 9.58% for a 5-year term. APRs range from 5.05% to 10.26% for a 10-year term. APRs range from 5.55% to 10.84% for a 15-year term. Fixed rates are based on the creditworthiness of the borrower and co-signer, if any. Loan Payment Example: The monthly payment per $10,000 borrowed at a fixed rate range of 5.05% APR to 10.26% APR for 10 years means you would make 120 payments which may range from $131.94 to $207.24. For the fixed rate loan, the monthly payment will remain fixed for the term of the loan. Payments may vary for other repayment term options.

    Variable Annual Percentage Rates (APRs): APRs range from 4.90% to 9.92% for a 5-year term. APRs range from 5.38% to 10.57% for a 10-year term. APRs range from 5.85% to 11.11% for a 15-year term. Variable rates are based on the London Interbank Offered Rate (LIBOR) index plus a margin depending on the creditworthiness of the borrower and co-signer, if any. The LIBOR index, adjusted quarterly, is equal to the average of the one-month LIBOR rates as published in the “Money Rates” section of the Wall Street Journal on the first business day of each of the three (3) calendar months immediately preceding each quarterly adjustment date. The LIBOR index is currently 2.47%. If the index increases or decreases, your rate will increase or decrease accordingly. Loan Payment Example: The monthly payment per $10,000 borrowed at a variable rate range of 5.38% APR to 10.57% APR for 10 years means you would make 120 payments which may range from $135.93 to $212.65. For the variable rate loan, the monthly payment may increase or decrease if the interest rate increases or decreases. Payments may vary for other repayment term options.

    APRs and loan payment examples are for the fully deferred repayment option for the Undergraduate & Graduate loan programs and include the 0.50% interest rate discount for automatic payments. The lowest APR is available to well qualified applicants. Your actual APR will be based on your credit qualifications, selection of fixed or variable rate option, loan program, repayment term, repayment option and whether you elect the automatic payment feature. Loan payment examples assume 30 days to first payment after the deferment period (45 months in school and 6 month grace period). Payments vary for other rates, repayment terms and repayment options.

    In addition to Undergraduate and Graduate loans, PNC offers loans for Health & Medical Professions, Health Professions Residency and Bar Study. Rates may vary by loan program and are subject to change at any time. Visit pnconcampus.com for current rates, additional loan payment examples and more details about the Solution loan products.

  3. Automatic Payment Discount: During repayment, an interest rate discount of 0.50% is available for automatic payments. Borrower must be making scheduled payments that include both principal and interest. Interest only payments do not qualify for the 0.50% interest rate discount. Automatic payment can be established through the loan servicer American Education Services (AES). Advertised rates include the 0.50% automatic payment interest rate discount. The rate discount will be applied at the time automatic payment is established. If automatic payment is not established, the available rates will be 0.50% higher than the advertised rates. If automatic payment is established and discontinued at any time during repayment, the borrower will no longer receive an automatic payment discount and the rate will increase by 0.50%. Discount may also be suspended during periods of forbearance or deferment. Payments may be made from a checking or savings account. A federal regulation limits the number of transfers that may be made from a savings or money market account. Please contact your financial institution for more information on transfer limitations on savings accounts.
  4. Repayment Options: Immediate, interest only payments while in school and full deferment of principal and interest options available. Interest will continue to accrue during periods of deferment. You will receive quarterly interest statements during this deferment period. Paying the interest as it accrues each quarter will save you money over the repayment term of the loan because any accrued interest that you do not pay will be added to the principal balance at the end of the deferment.
  5. Co-Signer Release: A request to release a co-signer requires that, as of the date of the request, you have made at least forty-eight (48) consecutive timely payments of principal and interest with no periods of forbearance or deferment within the forty-eight (48) month timeframe. “Timely payment” means each payment is made no later than the 15th day after the scheduled due date of the payment. “Consecutive payment” means the minimum monthly payment must be made for the most recent forty-eight (48) months straight without any interruption. To qualify for a co-signer release, the borrower must submit a request, meet the consecutive, timely payment requirements, provide proof of income and pass a credit check.
  6. Tax Deductibility: Interest may be tax deductible. Consult a tax advisor.

Please note: PNC reserves the right to modify or discontinue the terms of these program at any time without notice. You are encouraged to explore all scholarship, grant and federal borrowing options before applying for a private loan. Private loans are subject to credit approval.

PNC is a registered service mark of The PNC Financial Services Group, Inc.
© 2019 The PNC Financial Services Group, Inc. All rights reserved. PNC Bank, National Association.

3.98% – 11.35%*,1Undergraduate and Graduate

Visit SallieMae

3.99% – 11.44%2Undergraduate and Graduate

Visit Earnest

3.96%
11.98%
3
Undergraduate, Graduate, and Parents

Visit College Ave

4.72%
11.87%
4
Undergraduate and Graduate

Visit Discover

3.66% – 9.64%5Undergraduate and Graduate

Visit CommonBond

4.90% – 11.11%6Undergraduate and Graduate

Visit PNC

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

You're on your way...

We'll take you to Lendingtree.com where you'll be able to fill out one form to get multiple personal loan offers, based on your creditworthiness.