Should I take out a private student loan?
If youâ€™re headed to college or graduate school, you might be asking yourself this important question. While most students should max out their eligibility for federal student loans before turning to private ones, private student loans can be a useful tool for covering additional costs.
But private student loans have some key differences from federal ones, and itâ€™s crucial to understand all their pros and cons before borrowing. Here are the benefits and disadvantages of taking out private loans for school, along with some scenarios when borrowing private student loans makes sense.
While federal student loans come with some of the lowest interest rates and most flexible repayment plans, they also have built-in borrowing limits. You might reach that limit and still need more money to cover tuition, fees or other costs of college.
But most private lenders let you borrow up to the full cost of attendance of your school, so you donâ€™t have to worry about running out of funds. Sallie Mae and College Ave Student Loans, for instance, let you take out as much as you need to cover your school-certified cost of attendance.
When taking out private loans for school, you typically donâ€™t have to worry about falling short of funds.
Although you can usually borrow as much as you need in private student loans, youâ€™ll have to meet credit and income requirements first. Private lenders want to ensure you can pay back your loan in full and on time.
Of course, many college students donâ€™t have much credit or income to speak of yet. If that describes you, you may need to apply with a creditworthy cosigner, such as a parent. According to data firm MeasureOne, more than 92% of undergraduate private student loan borrowers applied with a cosigner in the 2018-2019 academic year.
Unfortunately, if you canâ€™t meet underwriting requirements and donâ€™t have anyone to cosign debt with you, youâ€™ll probably have a hard time qualifying for a private student loan.
The interest rates on federal student loans are set by Congress, but private student loans are a different story. Each lender decides its own rates and assigns them based on your credit and income.
If youâ€™re an especially strong candidate, you could get low rates on a student loan, perhaps even lower than the 5.05% rates currently on federal direct loans for undergraduates. As of May 6, 2019, for instance, Citizens Bank was offering variable rates starting at 4.45% and fixed rates starting at 5.74%.
A low interest rate will make your student loan more affordable, perhaps even allowing you to pay it off ahead of schedule.
On the flip side, you might end up with a high interest rate on your private student loan. Some of the lenders mentioned earlier have both fixed and variable rates that range well above what federal loans offer.
A high interest rate can add enormous costs on top of your principal amount, especially if youâ€™re spreading repayment out over 10 or more years. (Check out our student loan calculators to get an idea of how much.) Plus, variable rates have the potential to increase over time, leaving you with an even more expensive loan than when you started.
If you do find yourself in this situation, you might look into refinancing your student loans. Through refinancing, you could switch to a fixed rate and potentially lower your rate, too.
In recent years, some federal student loan servicers, such as Navient, have come under fire for a variety of borrower complaints. But some private lenders have a reputation for better customer service for borrowers.
And while private lenders arenâ€™t always so flexible when it comes to changing your repayment plan, some do offer perks like deferment. If strong support and extra perks are important to you, research customer reviews before choosing a lender.
Even if a private lender has a reputation for transparent and helpful customer service, it might not be very flexible when it comes to repayment options. While federal student loans have a variety of repayment plans, including income-driven plans and graduated repayment, private loans tend to be more straightforward.
You agree to a repayment plan when you take out the loan, typically one with monthly payments over 10 years, and you are expected to stick to that contract. Most private student loans donâ€™t offer income-driven repayment or other flexible plans that can help if youâ€™re struggling to pay your loans.
As mentioned, a few do let you postpone payments through forbearance or deferment if you run into financial hardship or lose your job. But apart from these benefits, you probably wonâ€™t have much luck when it comes to changing your repayment plan, unless you refinance for new terms.
Before borrowing private student loans, come up with a plan for repaying them on time. Missing payments on private student loans could quickly lead to default, which could damage your credit score and even land you in court.
Depending on your job and where you work, you could qualify for repayment assistance on your private student loans. Most states, along with some private organizations and universities, offer loan repayment assistance programs (LRAPs) to eligible professionals.
Most of these programs require that you work for a given number of years in a high-need area. Some jobs that often have LRAPs available include doctor, nurse, pharmacist, dentist, veterinarian, lawyer and teacher.
If you meet the requirements, you could earn thousands in repayment assistance to put toward your private or federal student loans. Outside of these programs, some employers also offer a student loan matching benefit to help you pay off your student debt faster.
While you might be able to use an LRAP award or student loan benefit toward private student loans, you wonâ€™t be able to qualify for federal forgiveness programs, such as Public Service Loan Forgiveness or the loan discharge that comes at the end of an income-driven repayment plan.
These federal programs are reserved for federal student loans, so your private student loan debt wonâ€™t qualify.
Your private student loans might be a hefty bill from month to month, but they could save you money during tax season. The IRS currently allows you to deduct up to $2,500 in any student loan interest you paid over the year, whether that interest was on federal or private student loans.
Although you might have a big student loan balance, this tax break at least offers some relief.
Even if you need private student loans for all four years of college, you canâ€™t borrow the full amount all at once. Private lenders need to determine your eligibility each year, as well as double-check your school-certified cost of attendance.
As a result, youâ€™ll need to apply for private student loans each year. This requirement could get tricky if your or your cosignerâ€™s financial situation changes and you can no longer meet underwriting requirements for credit and income.
If you do find yourself in this situation, speak with your financial aid office about your options, which could include a grant or emergency loan from your school.
As you can see, the question of â€śShould I take out a private student loan?â€ť doesnâ€™t have a single answer that applies to everyone. Private loans come with advantages and disadvantages, and the decision to borrow one depends on your individual situation.
If any of these scenarios apply to you, though, taking out private loans for school could be the right decision.
Before exploring private student loans, itâ€™s wise to max out your eligibility for federal student loans, especially if youâ€™re an undergraduate. But if youâ€™ve hit your borrowing limit and still need more funding, private student loans could be the right solution. Just be careful not to borrow more than you need.
Strong credit means good rates on a private student loan, which lowers the cost of borrowing. If you have great credit or can apply with a cosigner who does, you might be a competitive candidate for a private student loan. In this case, you can feel confident about taking out private loans for school that wonâ€™t break the bank.
If youâ€™re heading to graduate school, you have three main options for student loans: federal unsubsidized loans, federal grad PLUS loans and private student loans. Unsubsidized loans are probably your best option, but only students with financial need can qualify.
Grad PLUS loans are also useful, but they come with relatively high costs â€” for the 2018-19 school year, they carried interest rates of 7.6%, plus a loan fee of 4.248%. If you can get a better deal on a private student loan, doing so might be the way to go. Just make sure youâ€™re comfortable sacrificing federal repayment plans and protections.
As you read above, private student loans donâ€™t have much of a safety net if you canâ€™t repay your debt. So come up with a plan for repayment before you borrow, and consider your post-graduation career path. If you have a clear idea of your plans, you can feel more confident that youâ€™ll have the means to pay back your loan once your grace period ends and repayment kicks in.
Taking on debt is not a decision that should be made lightly, especially if youâ€™re going to be paying it back for years after you graduate. Private student loans can be a useful tool for covering the costs of college, but you want to make sure they donâ€™t become a shackle around your ankles.
Carefully consider how much you need to pay for school, and come up with a plan for paying it back. Make sure you understand how interest will accrue on your debt, as well as what youâ€™ll be expected to pay on a month-to-month basis.
And before turning to private lenders, think about whether youâ€™re comfortable with the risks of private student loans, which include:
Learning about the potential pitfalls of private student loans can help you sidestep them. As long as you understand the risks and shop around for a good deal, taking out private loans for school could be the solution you need to finance your education.