When grants, scholarships and federal student loans aren’t enough, you can usually turn to private student loans to cover the costs of higher education. Since private loans work differently than federal loans and aid, however, it’s crucial to understand what you’re getting into when you borrow for college from a private lender.
There are some serious benefits that come with the best private student loans, including the potential for an incredibly low APR and a flexible repayment plan. This guide outlines the pros and cons of private student loans, as well as what to look for if you’re considering this college funding option.
What is a private student loan?
Private student loans are a form of financial aid that can be taken out for college expenses like tuition, fees and housing. Unlike federal student loans, private student loans are funded by banks and other lenders that are able to set any criteria they want for their loans.
Generally speaking, this makes private student loans a little harder to qualify for. You generally need good or excellent credit to qualify for private loans, whereas many federal student loans don’t even require a credit check.
Still, you shouldn’t let credit requirements scare you off from private student loans. If you haven’t had the chance to build your credit score yet, you may be able to qualify for private loans with a qualified co-signer.
How much can you borrow with private student loans?
One of the benefits of private student loans is their high loan limits. Unlike federal student loans, which cap funding at a maximum of $7,500 per year for dependent students and a maximum of $20,500 per year for independent students, many private student loans let you borrow up to the full cost of your education.
That said, some lenders do have lifetime loan limits. Sometimes these limits apply based on the type of private student loans you’re applying for.
For example, CommonBond sets its borrowing limit for medical school loans based on a school’s “published cost of attendance (COA) minus scholarships and other forms of assistance such as scholarships, grants, fellowships, and other financial aid.” However, it also sets a lifetime borrowing limit of $500,000.
Benefits of private student loans
The benefits of private student loans can depend a lot on the borrower, yet some of the best perks are almost universal. Here are some advantages you can look forward to if you utilize private student loans.
- Supplemental financing to federal student loans. While it’s generally recommended to max out federal student loan options first, there are situations where borrowers need more money to finish school. Private student loans can help to fill in the gaps get you to graduation day without a delay.
- Quicker application process. Whereas federal student loans require borrowers to fill out a Free Application for Federal Student Aid (FAFSA), private student loans do not. You can apply for most private student loans online in a matter of minutes without providing nearly as much information.
- Available for part-time college students. You have to be enrolled in school at least half time to qualify for federal Direct Loans, but some private lenders will let you borrow money if you attend school less often than that.
- Competitive interest rates. Student loan interest rates and loan terms can be incredibly generous for borrowers with excellent credit or a qualified co-signer. If you want to pay as little interest as possible on your student loans, private student loans are often the best way to do it.
Drawbacks of private student loans
While there are plenty of pros, you should also be aware of the downsides of private student loans. These cons may not be deal breakers, but knowing about the drawbacks can help you make an informed decision.
- Fewer repayment options. Whereas federal student loans often let you repay your balance for up to 30 years, private student loans tend to come with shorter repayment timelines and fewer repayment terms to choose from.
- No government-sponsored public service or teacher loan forgiveness. Programs like Public Service Loan Forgiveness (PSLF) are not available for private loans; in general, there are few forgiveness options for private loans.
- No income-driven payment plans. Some federal student loans can be repaid on income-driven repayment plans like Pay As You Earn (PAYE) or Income-Based Repayment (IBR). Private student loans typically only have traditional repayment options.
- No government deferment or forbearance. While some private student loans have hardship options if you’re having trouble making payments, these programs are not nearly as robust as federal student loans’ deferment and forbearance programs.
Is taking out a private student loan worth it?
Most experts suggest maximizing federal student loans and aid before you turn to private student loans. That way, you will have access to income-driven repayment plans if you want them, as well as protections like deferment and forbearance.
But it can make sense to borrow from a private lender in some situations, especially when you need more money to finish the college degree you started.
Other scenarios where private loans make sense include:
- You have a specific plan to repay the money you borrow in a short amount of time. If you’re confident in your ability to repay your student loan balance and you believe you’ll have the income to do it, private student loans could net you a lower APR.
- Your expenses suddenly change. If you already maxed out federal student loans and your college expenses suddenly go up, private student loans can help you access more funding quickly.
How to choose the best private student loan
As with any other financing option, it’s important to shop around before you decide how you’re going to fund your education. In other words, take the time to compare loan options from multiple lenders; don’t just go with the first private student loan company you come across.
Here are a few suggestions to help you shop for private student loans and choose the right lender for your needs.
- Choose between a fixed and variable rate. Many private lenders offer the choice between a fixed and a variable rate. A fixed interest rate is easier to budget for, since it will remain consistent throughout the loan term. Variable interest rates are less predictable because they can change over time, but they may be a better deal if rates remain low over the life of your loan.
- Compare interest rates. Interest rates determine how much your student loan will cost. Compare interest rate ranges from various private lenders to make sure you’re getting one that works with your financial situation. If a lender offers it, take advantage of prequalification offers — that way, you can see what rate you qualify for without the lender pulling a hard check on your credit report.
- Make sure the lender is compatible with your school. While a lender might sound good on paper, not all of them will work with your school. With that in mind, compatibility is important when you’re shopping for private student loans. To find out if a lender works with your school, you can check the lender website or call to inquire.
- Apply for the right loan for your education. Not all private student loans are created equal, and some loans are meant for students in specific programs. For example, you will need to explore specific private loan programs if you’re pursuing an MBA or planning to attend medical or dental school.
- Research each lender’s reputation. A lender’s reputation is just as important as yours when it comes to applying for a private student loan. Thankfully, there are lots of reputable third parties you can consider when you’re looking into a lender’s reputation. We recommend consulting the Better Business Bureau (BBB).
- Compare lender benefits. Some lenders offer specific benefits with their private student loans. Some might offer programs that make payments more manageable after graduation. Others offer discounts when you sign up for automatic payments each month.
Repayment options for private student loans
When it comes to private student loans, another factor you’ll want to consider is the repayment options available to you. The bulk of private lenders offer only a few repayment timelines to choose from.
With that being said, some lenders are slightly more flexible than others when it comes to repayment timelines. With College Ave, for example, you can repay most loans over five, eight, 10 or 15 years.
Another important detail to keep in mind is the fact that you can typically refinance your loans later on. This can be a good option if you don’t like the repayment plan you’re on and you want to secure a lower monthly payment or a different repayment timeline. You’ll lose out on federal benefits like deferment and forbearance when you refinance federal loans with a private lender, but consolidating loans in this way can potentially help you save money on interest and simplify your finances.
The bottom line
If you need to borrow money for school and you’ve maximized federal student loans and other federal aid, private student loans can be a good option to get through school. The best private student loans come with low rates that can help you save money on interest, and many companies even let you “check your rate” without a hard inquiry on your credit report.
When it comes to private student loans, you’ll have to be actionable when it comes to shopping around and comparing lenders. Some may be able to offer you a better deal than others, but you’ll never know unless you put in the time and effort to find out.
Featured image by @lira_n4 of Twenty20.