How to Decide If Taking Out Private Student Loans Is Your Best Option

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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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.

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 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.

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 2.63% as of April 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 here for more information about interest rates.                                                                               https://www.discover.com/student-loans/interest-rates.html

5 Important Disclosures for SunTrust.

SunTrust Disclosures

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.

  1. Interest rates and APRs (Annual Percentage Rates) depend upon (1) the student’s and cosigner’s (if applicable) credit histories, (2) the repayment option and repayment term selected, (3) the requested loan amount and (4) other information provided on the online loan application. If approved, applicants will be notified of the rate applicable to your loan. Rates and terms are effective for applications received after on or after 06/01/2019. The variable interest rate for each calendar month is calculated by adding the current index (One-month LIBOR index) to your margin. LIBOR stands for London Interbank Offered Rate. The One-month LIBOR is published in the “Money Rates” section of the Wall Street Journal (Eastern Edition). The One-month LIBOR index is captured on the 25th day of the immediately preceding calendar month (or if the 25th is not a business day, the next business day thereafter), and is rounded up to the nearest 1/8th of one percent. The current One-month LIBOR index is 2.500% on 06/01/2019. The variable interest rate will increase or decrease if the One-month LIBOR index changes or if a new index is chosen. The applicable index or margin for variable rate loans may change over time and result in a different APR than shown. The fixed rate assigned to a loan will never change except as required by law or if you request and qualify for the auto pay discount.
  2. APRs assume a $10,000 loan with two-disbursements and the summer savings rate discount of 0.50% (applicable to applications submitted for a credit decision between 12:00:00am EST on June 1, 2019 and 11:59:59pm EST on August 31, 2019). The high APRs assume a 15-year term with deferred principal payments. The low APRs assume a 7-year term, no deferment and payments beginning 30-60 days after the last disbursement via auto pay from a SunTrust Bank account. See footnote 6 for details about auto pay.
  3. Any applicant who applies for a loan the month of, the month prior to, or the month after the student’s graduation date, as stated on the application or certified by the school, will only be offered the Immediate Repayment option. The student must be enrolled at least half-time to be eligible for the partial interest, fully deferred and interest only repayment options unless the loan is being used for a past due balance and the student is out of school. With the Full Deferment option, payments may be deferred while the student is enrolled at least half-time at an approved school and during the six month grace period after graduation or dropping below half-time status, but the total initial deferment period, including the grace period, may not exceed 66 months from the first disbursement date. The Partial Interest Repayment option (paying $25 per month during in-school deferment) is only available on loans of $5,000 or more. For payment examples, see footnote 4. With the Immediate Repayment option, the first payment of principal and interest will be due approximately 30-60 calendar days after the final disbursement date and the minimum monthly payment will be $50.00. There are no prepayment penalties.
  4. The 15-year term and Partial Interest Repayment option (paying $25 per month during in-school deferment) are only available for loan amounts of $5,000 or more. Making interest only or partial interest payments during in-school deferment (including the grace period) will not reduce the principal balance of the loan. Payment examples within this footnote assume a 45-month deferment period, a six-month grace period before entering repayment, the summer savings rate discount of 0.50% applicable to applications submitted for a credit decision between 12:00:00am EST on June 1, 2019 and 11:59:59pm EST on August 31, 2019, no rate reduction for auto pay, and the Partial Interest Repayment option. 7-year term: $10,000 loan disbursed over two transactions with a 7-year repayment term (84 months) and 7.772% APR would result in a monthly principal and interest payment of $189.71. 10-year term: $10,000 loan disbursed over two transactions with a 10-year repayment term (120 months) and an 8.235% APR would result in a monthly principal and interest payment of $153.33. 15-year term: $10,000 loan disbursed over two transactions with a 15-year repayment term (180 months) and a 8.712% APR would result in a monthly principal and interest payment of $127.35.
  5. The 2% principal reduction is based on the total dollar amount of all disbursements made, excluding any amounts that are reduced, cancelled, or returned. To receive this principal reduction, it must be requested from the servicer, the student borrower must have earned a bachelor’s degree or higher and proof of such graduation (e.g. copy of diploma, final transcript or letter on school letterhead) must be provided to the servicer. This reward is available once during the life of the loan, regardless of whether the student receives more than one degree.
  6. Earn an interest rate reduction for making automatic payments of principal and interest from a bank account (“auto pay discount”) by completing the direct debit form provided by the Servicer. Earn a 0.25% interest rate reduction when you auto pay from any bank account and an extra 0.25% interest rate reduction when you auto pay from a SunTrust Bank checking, savings, or money market account. The auto pay discount will be applied after the Servicer validates your bank account information and will continue until (1) three automatic deductions are returned for insufficient funds during the life of the loan (after which the discount cannot be reinstated) or (2) automatic deduction of payments is stopped (including during any deferment or forbearance, even if payments are made). In addition, the extra 0.25% interest rate reduction for auto pay from a SunTrust Bank checking, savings or money market account will be discontinued if automatic payments are no longer made from one of the aforementioned SunTrust Bank accounts. In the event the auto pay discount is discontinued, the loan will accrue interest at the rate stated in your Credit Agreement.
  7. A cosigner may be released from the loan upon request to the servicer, provided that the student borrower is a U.S. citizen or permanent resident alien, has met credit criteria, and met either one of the following payment conditions: (a) the first 36 consecutive monthly principal and interest payments have been made on-time (received by the servicer within 10 calendar days after their due date) or (b) the loan has not had any late payments and has been prepaid prior to the end of the first 36 months of scheduled principal and interest payments in an amount equal to the first 36 months of scheduled principal and interest payments (based on the monthly payment amount in effect when you make the most recent payment). As an example, if you have made 30 months of consecutive on-time payments, and then, based on the monthly payment amount in effect on the due date of your 31st consecutive monthly payment, you pay a lump sum equal to 6 months of payments, you will have satisfied the payment condition. Cosigner release may not be available if a loan is in forbearance.

6 Important Disclosures for LendKey.

LendKey Disclosures

Additional terms and conditions apply. For more details see 


7 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.


8 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Student Loan 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 June 1, 2019, the one-month LIBOR rate is 2.43%. Variable interest rates range from 3.99% – 11.79% (3.99% – 11.64% 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 4.90% to 12.19% (4.90% – 12.04% APR) based on applicable terms, level of degree earned and presence of a co-signer. Lowest rates shown 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. 
  2. 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.  
  3. Co-signer Release: Borrowers may apply for co-signer release after making 36 consecutive on-time payments of principal and interest. For the purpose of the application for co-signer release, on-time payments are defined as payments received within 15 days of the due date. Interest only payments do not qualify. The borrower must meet certain credit and eligibility guidelines when applying for the co-signer release. Borrowers must complete an application for release and provide income verification documents as part of the review. Borrowers who use deferment or forbearance will need to make 36 consecutive on-time payments after reentering repayment to qualify for release. The borrower applying for co-signer release must be a U.S. citizen or permanent resident. If an application for co-signer release is denied, the borrower may not reapply for co-signer release until at least one year from the date the application for co-signer release was received. Terms and conditions apply. Borrowers whose loans were funded prior to reaching the age of majority may not be eligible for co-signer release. Note: co-signer release is not available on the Student Loan for Parents or Education Refinance Loan for Parents.
3.99%
11.98%
2
Undergraduate, Graduate, and Parents

Visit College Ave

4.50% – 11.35%*,3Undergraduate and Graduate

Visit SallieMae

4.84%
11.99%
4
Undergraduate and Graduate

Visit Discover

3.27% – 10.80%5Undergraduate and Graduate

Visit SunTrust

4.46% – 9.43%6Undergraduate and Graduate

Visit LendKey

3.74%
9.72%
7
Undergraduate, Graduate, and Parents

Visit CommonBond

3.99%
11.64%
8
Undergraduate, Graduate, and Parents

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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.

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