Pros and Cons of Private Student LoansEmail This Article
Going to college is an exciting endeavor that will open-up career opportunities not otherwise available. Paying for college can sometimes present financial challenges and borrowing money is necessary to fund the effort. Federal student loans limit the amount a student can borrow in a given school year, making private student loans a desirable option to fill in the gaps.
As with anything, there are both pros and cons to private student loans. However, when compared to the benefits of a college degree, many decide the loan is well worth the expense as they pursue their educational dreams. Investigating your finance options is the best way to make an informed decision. Edvisors is here to help you understand your choices and guide you in the borrowing process. We encourage you to compare lenders and determine which one is right for you.
Should I Get a Private Student Loan?
Taking out any form of student loan is a commitment, and this decision should not be taken lightly. Whether you are borrowing federal or private student loans, this is money that will need to be paid back with interest. Should you decide to pursue a private student loan there are benefits (such as interest rate options and added benefits) and drawbacks (including the need for strong credit or a cosigner and limited hardship assistance)to consider before you borrow. We recommend you review the pros and cons of private student loans to help you determine what type of loan is right for you.
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Advantages of Private Student Loans
Fill the Financial Gap
It’s recommended to pursue a federal student loan first, however, this loan may not cover the entire cost of attendance throughout the school year. If you need to borrow additional funds, private student loans can help. You can borrow up to your school’s certified cost of attendance. COA (cost of attendance) is the average cost to attend your school for one year and includes costs like, tuition, books, fees, school supplies, housing, and transportation. Private student loans may be used to help with more than just tuition alone. You can use these funds for living expenses, transportation, books, fees, qualifying childcare, technology needs (such as a laptop), and more.
Potential Lower Interest Rates
Federal student loans come with a fixed interest rate for all borrowers regardless of credit history. The interest rate for private student loans is determined by the creditworthiness of you and your cosigner (if applicable). With most private student loans, you may choose from fixed or variable rates which may be lower than the fixed rate offered by the government. If you or your cosigner have excellent credit, it would be advantageous to shop around and compare rates.
Fixed or Variable Rates
With a private student loan, you will likely have the option of choosing between a fixed or a variable rate. Fixed rates often start out slightly higher than variable rates but stay the same for the life of the loan. A variable rate may start out lower than a fixed rate, but will fluctuate with market changes, possibly going up or down—you’ll be given your interest rate range when you begin the application process. This means the amount of interest that accrues on your student loan could increase or decrease over time. You want to make sure you can afford your payments at the highest interest rate of your range, just in case your interest rate increases to that amount. For the best possible rate, apply with a cosigner with a strong credit history.
Higher Borrowing Limits
Federal Direct Stafford loans have both annual and cumulative (total) borrowing limits. These loan limits can create a financial aid gap when you’re trying to pay for college. If you are attending college out of state or an expensive private school, your financial aid may not be enough to cover all your financial needs. If you qualify, private student loan lenders may allow you to borrow up to your cost of attendance minus other financial aid received. While private student loan lenders may limit your borrowing based on your credit or borrowing history, but if you are eligible private student loans can be used to help you cover your college costs.
>>More: Federal Student Loan Limits
Unique Lender Benefits
Private student loans are issued by private lenders such as banks, credit unions, and other financial institutions. These lenders may offer additional benefits to their borrowers, such as access to services like Chegg, grace periods, and interest rate deductions for enrolling in automatic payments.
Apply Anytime, Year-Round
You may apply for a private student loan at any time, even during the current school year. Should you underestimate how much funding you need to complete your course of study, a private student loan can help. For example, if you need additional funds to complete the Spring semester, a private student loan is an option. Most private student loans have low borrowing minimums, allowing you to borrow only what you need and keep your overall costs down.
Cosigner Release Options
Most traditional college students (typically those entering school right out of high school) will not qualify for a private student loan on their own, due to lack of employment and credit history and will likely require a cosigner. Many private student loans offer a cosigner release option, allowing the borrower to request the cosigner be released from responsibility for the loan once the borrower meets the lender’s criteria. While each lender has their own criteria, lender’s will typically require the borrower to demonstrate their ability to repay by making 24 to 48 months of on-time payments.
Disadvantages of Private Student Loans
Must Have Good Credit
If the borrower is just beginning to establish credit and has insufficient or poor credit, they will likely need a cosigner to qualify for a private student loan. A cosigner is someone with a strong established credit history who is equally responsible for the loan. This is typically a parent, family member, or other trusted adult with stable employment and a positive credit history.
Limited Hardship Assistance
Unlike federal student loans that come with generous periods of forbearance(allowing a borrower to pause payments on their student loan for a variety of reasons), private student loans do not. Forbearance benefits for private student loans will vary by lender but are typically shorter in duration and only extended to borrowers in cases of extreme hardship.
Fewer Repayment and Forgiveness Options
Federal student loans have a variety of repayment options, including public service loan forgiveness (PSLF) and income-based repayment plans. Private student loans may offer flexible repayment options, but your options may be more limited. In addition, most private student lenders don’t offer student loan forgiveness options like PSLF, while some may offer discharge options for total and permanent disability or death of the borrower.
Private Student Loan Tips
Borrow Only What You Need
Try to utilize as many resources as possible before deciding to borrow any money. The cost of college can be offset by grants, scholarships or by working while in school. Some employers even offer tuition assistance that can help cover your expenses. Investigating all your options and borrowing only what you need will keep you student loan balance down and put you in a better position to pay it off once you have graduated.
Apply with a Cosigner to Get a Better Rate
Most traditional college students (recent high school graduates) will not have the employment or credit history needed to qualify for a private student loan on their own. Applying with a cosigner with a strong credit history increases chances of approval and may also help you qualify for a lower interest rate (saving you money in the long run)
>>More: Student Loan Cosigners
Be Mindful that Variable Interest Rates May Change
Private student loans typically give the borrower the choice of a fixed or variable interest rate. The lowest variable interest rates are typically lower than the lowest fixed interest rates, however, while a fixed interest rate stays the same for the life of the loan, a variable rate may change with market fluctuations. This could impact the interest that accrues on your loan. It will also have an impact on loan repayment, as changes to the rate could increase or decrease your minimum payments. When you borrow a loan with a variable interest rate, make sure you can afford your payment at the highest interest rate (the top of your range) listed in your loan’s term and conditions. If you are looking for consistency, then a fixed interest rate will ensure the same payment amount over the life of the loan.
Pay Your Loans While In School if You Can
Some private student loans will not require you to make payments while still in school, however it is wise to make payments on your student loans as soon as you can. This will help minimize the overall amount of interest you accrue over the life of your loan and help keep your balances down. By paying on your loan while in school, you will have less student loan debt to repay upon graduation.