When it comes to student loans, conventional wisdom says to exhaust your federal options before you look to private lenders.
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 4.72% – 12.19%. And College Ave student loans have rates of 4.54% – 11.98%.
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.
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!
|* 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 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 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 11/4/2019. Variable interest rates may increase after consummation.
2 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
3 Important Disclosures for Discover.
Discover's lowest rates shown are for the undergraduate loan and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments.
4 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restrictions. Loans are offered through CommonBond Lending, LLC (NMLS #1175900).
5 Important Disclosures for Citizens.
Undergraduate Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of November 1, 2019, the one-month LIBOR rate is 1.80%. Variable interest rates range from 2.90% – 11.16% (2.90% – 11.01% APR) and will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. Fixed interest rates range from 4.72% – 12.19% (4.72% – 12.04% APR) based on applicable terms, level of degree earned and presence of a co-signer. Lowest rates shown requires application with a co-signer, are for eligible applicants, require a 5-year repayment term, borrower making scheduled payments while in school and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of the loan.
Citizens Bank Student Loan Eligibility: Borrowers must be enrolled at least half-time in a degree-granting program at an eligible institution. Borrowers must be a U.S. citizen or permanent resident or an international borrower/eligible non-citizen with a creditworthy U.S. citizen or permanent resident co-signer. For borrowers who have not attained the age of majority in their state of residence, a co-signer is required. Citizens Bank reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Citizens Bank private student loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, and if applicable, self-certification form, school certification of the loan amount, and student’s enrollment at a Citizens Bank- participating school.
Please Note: International Students are not eligible for the multi-year approval feature.
|2.84% – 10.97%1||Undergraduate, Graduate, and Parents|
|3.12% – 10.54%*,2||Undergraduate and Graduate|
|3.37% – 11.87%3||Undergraduate and Graduate|
|3.52% – 9.50%4||Undergraduate and Graduate|
|2.90% – 11.16%5||Undergraduate and Graduate|