College students are usually advised to take advantage of federal student loans offered by the Department of Education before taking out private student loans.
In fact, private student loans offered by private lenders are far less popular than federal loans, making up just 9.26 percent of the $106.8 billion in student loans originated in 2015-16, according to data from The College Board.
But if private student loans are your only option to pay for college, what then? Weigh the following pros and cons before you decide if it’s the right course of action for you.
The pros and cons of taking out private student loans
Pro: Potential for lower private student loan rates
Although federal student loan rates are the same for everyone, private student loan rates are different for each borrower, lender, and loan.
That means you could qualify for private student loan rates that beat federal student loan rates. The potential for interest savings might be one reason for taking out private student loan debt.
For example, my husband earned a master’s degree in 2012 financed solely with a $26,000 private student loan at 3.25%. That’s less than half the 6.80% offered on federal graduate Direct Loans at the time or the Grad PLUS Loan rate of 7.90%.
Con: Varied and variable rates
Having your interest rate determined by your credit score won’t always lead to savings, however.
My husband had excellent credit and worked full time between his bachelor’s and master’s degrees. Although he had a high enough credit score to get a lower interest rate on a private student loan, most students won’t. In fact, private student loan rates can be 18.00% or higher, according to the Federal Student Aid Office.
Additionally, private student loan rates are often variable rather than fixed, which means your rates could rise even in repayment. For instance, my husband’s initial private student loan interest rate of 3.25% has been bumped up to 4.75% over the past five years. It still beats what we would be paying with federal student loans, though.
Pro: You don’t have to maintain financial aid eligibility
The Federal Student Aid Office sets specific requirements students must meet to be eligible for financial aid, including federal student loans.
Although many college students can meet financial aid eligibility guidelines, not all will. For example, international students are ineligible for federal student loans. And students can lose financial aid eligibility (if their GPA falls, for instance).
Ultimately, students who aren’t eligible for financial aid can turn to private student loans to finance their college education. Federal aid eligibility rules don’t apply to private student lenders, and each one sets its own guidelines to approve or deny applications.
Con: You need good credit to qualify
If you’re hoping to get a private student loan, you’ll need good credit. This is a fundamental difference between federal and private student loans: The former has no credit check or credit requirements, but the latter does.
A good credit score for a private student loan is usually at least in the mid-600s. But if you have excellent credit — typically 720 or higher — you can qualify for lower private student loan rates that net savings.
If you can’t qualify for a private student loan with a specific lender, you’ll need to apply with a co-signer who can meet the lender’s requirements. Be aware that a co-signer is equally responsible for and affected by this debt. If you don’t pay, the co-signer will be on the hook for the balance, and the payment history will affect both your credit scores.
Pro: Flexible loan limits
Another key difference between federal and private student loans: your limits on borrowing amounts.
Federal student loan limits set a cap on how much a student can borrow to pay for college, both each year and cumulatively. Most private lenders, however, have higher student loan limits.
Although private student loans aren’t unlimited, students can usually borrow up to their school’s cost of attendance. That means students who are approaching or have reached federal student loan limits can access further funding through private student loans.
Cons: Fewer repayment options
Students taking on private student loan debt should also be aware that private lenders tend to offer fewer ways to adjust repayment.
For instance, federal student loan payments are automatically deferred for students until they graduate or otherwise unenroll in courses. But many private student lenders have shorter deferment periods, and some require students to begin repayment while in college.
Additionally, federal student loan servicers must offer deferment, forbearance, and access to federal repayment plans, including income-driven repayment.
But private lenders set their own rules for forbearance and repayment. These private student loan protections are typically much less generous and flexible than repayment options for federal student loans.
4 scenarios where taking out private student loans makes sense
Now that you’ve reviewed the pros and cons of taking out private student loans, here are a few scenarios where borrowers might benefit from them the most.
1. You’re choosing between private student loans and PLUS Loans
You’re more likely to net savings if you’re turning to private student loans as an alternative to PLUS Loans.
That’s partly because PLUS Loans carry the highest federal student loan interest rate at 7.00% and a one-time fee of 4.264 percent. Although beating the 4.45% rate on undergraduate loans is unlikely, it’s possible to get a private student loan with an interest rate below the 7.00% PLUS rate.
Additionally, PLUS Loans are available only to parents and graduate students. But these two groups are more likely than undergraduate students to meet private student loan eligibility requirements — such as a stable income, solid credit score, and longer credit history.
2. You can’t borrow more through federal student loans
It’s wise to max out your federal student loans (besides PLUS Loans) before considering private student loan debt. Ultimately, federal student loans have more borrower protections than private student loans.
However, there are a few times when federal student loans aren’t an option:
- You’re attending educational program that is ineligible for the federal Direct Loan program.
- You’ve hit borrowing limits on federal student loans.
- You’ve lost your federal student loan eligibility or were never eligible to begin with.
If you can’t borrow the funds you need for college through federal student loans, turning to private student loans might be an option. This decision shouldn’t be taken lightly, though, and you should consider all your options — including taking a break from college — before applying.
3. You have solid post-graduation employment prospects
Since private student loans don’t offer the same borrower protections as federal loans, your safety net is much smaller — or nonexistent. You need to be reasonably sure you can afford to repay them.
Before enrolling in an educational program — particularly one that’s not eligible for federal aid or loans — research employment outcomes. Check out the numbers on rates of completion, job placements, and post-graduation salaries. Most colleges publish this information on their website or will provide it upon request.
Researching this information will give you a real-world picture of how easy it will be to graduate, how quickly you’ll find a job, and how much money you can expect to earn. If you’re in a program with positive outcomes for graduates, then paying private student loans will be much easier.
4. You have great credit (or a co-signer who does)
For many borrowers, the question of whether to take out private student loan debt is replaced by the question of whether they can qualify.
If you have good credit — or a co-signer who does — getting private student loans will be simpler. Plus, your chances of landing a low interest rate (and the savings that come with it) will be better.
Understand the risks before taking out private student loans
Overall, the decision to take out private student loans is one you should make carefully. For the majority of students, federal student loans will be the wiser option. But a small portion of students could be well-served by a private student loan.
Just be mindful of the following caveats when you take out private student loans:
- Many students borrow private student loans without reaching their federal loan limits. Know your federal student aid options and use those funds before turning to private student loans.
- Paying private student loans can be a challenge, and you’ll have fewer options to adjust payments. Try to find a lender with forbearance options in case of hardship.
- The events that trigger private student loan default are different for each lender. Make sure you understand how it could happen so you can avoid it. Also make sure you have an emergency fund and other financial safeguards in place to protect you from default.
- If you borrow with a co-signer, you’re both on the hook for the loan. Make sure you’re responsibly paying private student loans to preserve your good credit histories — and your relationship.
Carefully work through your options before taking out private student loans. Once you’re in the repayment phase, make sure you stay on top of paying them so you avoid going into default.
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|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 5/29/2019. 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.
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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.
* Offer valid for new Custom Choice Loans for which applications are submitted for a credit decision between 12:00:00am EST on June 1, 2019 and 11:59:59pm EST on August 31, 2019. A 0.50% interest rate reduction will be included in the loan options presented to an applicant during the online application process, upon passing the initial credit review. The interest rate reduction will be applied as of the first disbursement date and will be effective for the life of the loan.
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% – 11.98%2||Undergraduate, Graduate, and Parents|
|4.50% – 11.35%*,3||Undergraduate and Graduate|
|4.84% – 11.99%4||Undergraduate and Graduate|
|3.27% – 10.80%5||Undergraduate and Graduate|
|4.46% – 9.43%6||Undergraduate and Graduate|
|3.74% – 9.72%7||Undergraduate, Graduate, and Parents|
|3.99% – 11.64%8||Undergraduate, Graduate, and Parents|