Pros and cons of private student loans: 5 factors to consider

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Private student loans are educational loans offered by private lenders like banks, credit unions and online lenders. Unlike federal student loans, private loans typically don’t come with benefits like income-driven repayment plans and loan forgiveness options — which is why it’s typically best to apply for federal student loans first.

But if you’ve exhausted your allotment of federal loans, private loans can come in handy, and in some cases, you could even get a lower interest rate.

What is a private student loan, and why get one?

Private student loans are a way to finance your education through a private lender. These lenders operate outside of the Department of Education, which offers federal student loans. Students take out private student loans to help pay for tuition, fees, room and board, transportation and more. While private student loans do charge interest — adding to the overall cost of your education — they’re often necessary after borrowers have exhausted scholarship, grant, work-study and federal student loan opportunities.

In most cases, college students should turn to federal student loans first if they need help financing their education. This is primarily because federal loans give you access to income-driven repayment plans and loan forgiveness programs, but also because there’s no credit check for most loans, and everyone who qualifies gets the same interest rate.

So why get a private student loan? Most federal loans limit how much you can borrow each year and in total. Depending on how much your educational expenses are, you may run out of your allotment, and private loans can be a good way to bridge the gap. And for parents and graduate students who have built a good credit history, private student loans could end up being cheaper than federal loans.

Private student loans vs. federal student loans

Private student loans Federal student loans
Standardized interest rates No Yes
Fixed and variable rates Yes No
Upfront loan fee Generally no Yes
Requires a credit check Yes Mostly no
Requires a co-signer Generally yes Generally no
Access to loan forgiveness programs No Yes
Access to income-driven repayment plans Generally no Yes
Loan limits Typically up to your total cost of attendance Varies by loan program

Benefits of private student loans

In the right situation, private student loans can have some clear benefits. Here are some to keep in mind.

Can be cheaper than federal loans

If you’re an undergraduate student, you likely won’t find anything cheaper than a federal student loan, especially if you haven’t had the chance to build a credit history. But graduate and parent loans through the Department of Education are pricier than undergraduate loans, both with interest rates and the upfront loan fee.

If you have a solid income and a high credit score, you could potentially score a lower interest rate than what the federal government charges. Also, private student lenders typically don’t charge an upfront fee.

Depending on the situation, it’s good to compare what you might qualify for with private lenders and what the federal government offers.

Higher borrowing limits

If you’re attending an expensive school, you may not get the amount you need if you only go through the federal government for student loans.

If you’re an undergraduate student, for instance, you can borrow between $5,500 and $12,500 per year, depending on your year in school and dependent status. The lifetime maximum is $31,000 for dependent students and $57,500 for independent students.

With private loans, however, you can typically borrow up to the total cost of attendance every year, giving you more flexibility to get the financing you need.

Drawbacks to private student loans

Although private loans can be beneficial in certain situations, there are also some major drawbacks that make them less appealing for most students.

No access to income-driven repayment or forgiveness

The average student loan payment is $393, according to student loan platform Purefy. For many, it can be challenging to keep up with monthly payments along with their other necessary expenses.

While federal loans offer income-driven repayment plans that reduce payments based on borrowers’ income, most private lenders don’t extend that same generosity. Also, if you work as a teacher or in some other form of public service, you may qualify to have some or all of your federal loans forgiven after you meet certain criteria. Private lenders don’t come with that option, nor would they be included in any executive action canceling student debt.

Interest rates are based on creditworthiness

In some cases, you can qualify for lower interest rates with private lenders than what the federal government offers. But private lenders offer a range of rates, and unless your income and credit score are stellar, you may end up with a much higher rate than you want.

Of course, many private lenders allow you to apply with a co-signer, such as a parent, which can improve your chances of getting favorable terms. But even that’s no guarantee.

It’s also important to note that the lowest private student loan interest rates are generally variable, which means that they fluctuate over time with market conditions. If you get a variable-rate loan, your monthly payment could increase over time.

There’s no federal subsidy

Undergraduate students with financial need may qualify for subsidized federal student loans. With these loans, the federal government pays your interest while you’re in school, as well as during future deferment periods.

With private loans, though, there is no subsidy, so you’re on the hook for all the interest that accrues on your debt.

Who a private student loan is best for

In most situations, it’s better to start with federal student loans than private student loans. For some college students, federal student loans are all they need, especially if they’ve been given scholarships or grants. However, there are some situations where it’s worth considering private loans:

  • You’ve exhausted your allotment of federal student loans and still have expenses to pay.
  • You have good credit and can get better terms through a private lender.
  • You don’t anticipate needing access to federal loan forgiveness programs or income-driven repayment plans.

As with any financial decision, it’s crucial that you take time to understand all of your options and consider each one carefully before you submit an application.

Next steps

Most college students would benefit by sticking to federal student loans, if possible. But if you’re considering private student loans, the good news is that private lenders typically allow you to get a rate quote based on just a soft credit check. This way, you can calculate exactly how expensive your loan will be over time. Take your time to compare each option that’s available to you to determine the best path forward for you.

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Written by
Ben Luthi
Contributing writer
Ben Luthi is a personal finance and travel writer who loves helping people learn how to live life more fully. His work has appeared in several publications, including U.S. News & World Report, USA Today, Yahoo! Finance and more.
Edited by
Student loans editor