The average cost of college continues to grow year after year. In fact, an annual growth rate of 6.8% has led the cost to triple over 20 years. The average student can expect to spend $35,720 per year on their education.
The high cost of post-secondary education leaves many students and their families wondering how to pay for college. Let’s take a dive into the pros and cons of private student loans that you need to know.
In general, there are two main types of student loans available: federal and private. They both have their pros and cons, but it’s important to know exactly what is entailed with each.
Federal student loans are issued through the US Department of Education. Interest rates, fees, and terms and conditions are determined by law, so they are the same for everyone.
Private student loans are offered through private institutions, such as banks and credit unions. You’ll need to meet certain requirements, which vary between lenders.
There are three common types of student loans:
Higher borrowing limits – Federal student loans have caps on the amount you can borrow each year and in total. But many need more than that to cover tuition and other school expenses.
Private student loans can help cover the gap because they usually have a higher borrowing limit. Many lenders allow you to borrow up to 100% of the cost of attendance.
Flexible borrowing options – Private student loans are not based on need. If you meet the credit, income, and any other requirements to borrow, you should be approved. You can probably use a cosigner to meet the requirements.
It may be possible to release a cosigner from a private student loan depending on the lender. Usually, the student must make a number of on-time payments and possibly meet other requirements.
Potential savings – Federal student loans only offer fixed rates. Private student loans may offer variable or fixed rates. A variable rate may be lower now, helping to save money early on.
If you have great credit or have a cosigner who does, you may be able to save money by qualifying for a lower interest rate. Some lenders will offer lower rates or other discounts for good grades or automatic payments.
Statute of limitations – If you default on a federal student loan, there is no statute of limitations. You need to eventually pay it back. This means your wages or tax refunds could even be garnished.
For private student loans, there is a statute that varies between states. It can be anywhere from 3-10 years. But, if something bad happens financially, you won’t be continually hounded over the debt forever.
Strict borrowing requirements – Private student loan lenders usually require a good credit score, possibly as high as 720. Even if the student has good credit, the lender may not approve them without a cosigner due to low income.
This can especially be a problem for young students who have limited credit histories and unstable income. Even if they are approved, these students often face higher interest rates.
Variable rates may increase – A variable rate may help you save money in the immediate future. But, it could always increase. This means over time, you’ll end up paying more out of pocket. In addition, the interest on private student loans is not tax-deductible.
Limited repayment and forgiveness options – Federal loans have programs that make it easier to pay back the loans if you run into financial trouble. There are also programs that offer to forgive your debts if you pursue a public service career.
Many private lenders don’t offer these types of repayment assistance or forgiveness programs. If your loan goes into default due to missed payment, you or your cosigner may end up with negative marks on your credit report.
No subsidies – While you’re in school, the government may pay the interest on your loans. Or during repayment, interest won’t accrue on the debt. It depends on the type of loan you have, but these options are only available for federal loans, not private student loans.
After death debt – For most federal loans, no cosigner means your debt won’t count against your estate if you die. If you don’t have a cosigner, private lenders won’t collect from your relatives. However, they can collect against your estate. This could reduce the inheritance for your loved ones.
Cover the gap – If you need assistance paying for school, look at all of your other options first. This could include federal loans, scholarships, grants, and work-study programs. Use private loans to cover the gap if needed.
Research and compare – Private lenders offer a wide range of fees, rates, terms, and borrower protections. Compare your options to make sure you choose the best lender for you.
Think outside the box – Local banks and credit unions are not the only places to apply for private student loans. See if your school or state offers assistance.
Also, be sure to check out online-only lenders. They save money by not having brick-and-mortar locations and pass these savings onto you through lower interest rates and fees.
Only borrow what you need – Eventually, you’ll need to pay back your debt. Many people overestimate the income they’ll have after graduation. It’s important that you can budget for it and pay it back.
Pay it back ASAP – The interest on most private student loans begins to accrue as soon as the loan is disbursed. Most lenders allow for early repayment without a penalty.
By paying your loan back as soon as you can, you’ll save a ton of money on interest. You can even start paying on them while you’re still in school.
There are several key advantages and disadvantages to private student loans. It’s important to make an informed decision on where they are right for you.
Once you are ready to apply for student loans, do your research to find the best student loans for you. Enter your school name to compare options and apply for a private student loan using the Best Student Loan platform.
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