Paying for college can come at a steep price. According to CollegeBoard, the average cost of tuition, accommodation and meals at four-year public universities is $ 21,950. This cost is $ 49,870 for students attending private colleges.
While federal loans can help cover education costs, there is a limit to how much you can borrow each year. Take out a private student loan can help you when the financial aid offered by your college does not cover the full cost of your tuition. Before taking out private student loans, it is important to consider the pros and cons.
Benefits of a private student loan
First, let’s take a look at what’s good about using a private student loan to pay for your education when your financial aid is insufficient.
1. Higher borrowing limits
The Department of Education caps the amount of money you can borrow with federal student loans. This could make paying for college education difficult if you are attending a more expensive school to get your undergraduate degree or are preparing for graduate school.
Some of the best private student loan lenders can allow you to borrow up to 100% of your education costs, which can take the worry out of being able to cover your tuition, fees and other expenses while you study. If you’ve reached your limit as a federal student loan borrower, visit Credible to explore private student loan options.
2. Possibility of lower interest rates
A key feature of a federal student loan is that you usually benefit from a low fixed rate. But thanks to the Federal Reserve’s decision to cut interest rates to near zero, private student loan interest rates approach historic lows.
It is a good incentive to get a private student loan sooner rather than later. And if your parents help pay for school, private student loans can have lower costs than Federal PLUS loans.
If you haven’t looked at private student loan rates lately, this is a must. Credible, it’s easy to compare fixed rate loans and variable rate loans from different private lenders in one place without affecting your credit score.
3. Some lenders offer special incentives
Your choice of private student lender is important, as some lenders may offer benefits other than low interest rates. For example, your lender may allow you to temporarily defer your payments if you lose your job, or offer you career advice to help you find your next job.
Use Credible to Compare Lenders and see what each has to offer.
You will also be able to enjoy other benefits, such as a reduction in the interest rate when you sign up for automatic payments or the ability to skip a payment once a year if your account is in good standing. And some private student loan lenders offer flexible repayment options so you can choose a payment schedule and plan that fits your budget.
These are small things, but they could make a big difference in managing your student loans.
4. Qualify for Private Student Loans If You Lose Your Federal Loan Eligibility
Default on a federal student loan or falling behind in your academic progress requirements could make you ineligible for new federal loans. Private student loan lenders, on the other hand, do not necessarily require satisfactory academic progress or full-time enrollment to be eligible for loans.
They do, however, require a good credit rating. So if you have defaulted on a federal loan and it was reported to the credit bureaus, you might need a co-signer to obtain private student loans.
Credible can show you what kind of rate you’re entitled to today with your current credit score – just plug it into their free online tools.
Disadvantages of a private student loan
Now that you know the advantages of private student loans, think about some potential disadvantages.
1. Loss of repayment options
A key feature of federal student loans is the ability to choose income-based reimbursement. An income-based repayment plan that determines your payments based on your income and the size of your household can help ensure you can afford what you have to pay. Income-based repayment is also required for federal student loan cancellation.
Private student loan lenders are not required to provide income-tested repayment. While some may offer flexible repayment options or temporary hardship programs, they are not required to. So, if you lose your job, you might find yourself in a difficult financial situation if your private loan repayment options are limited.
2. You may need a co-signer
If you don’t meet the credit score requirements for a private student lender you might need a co-signer to get approved. This can be an inconvenience if you are having trouble finding a creditworthy relative or friend who is willing to sign their name on your student loan debt.
On the other hand, having a co-signer on a private student loan could work in your favor if he has a good credit rating. Your co-signer’s credit history could help you get the best rates. And depending on the lender, you may be able to apply for the release of the co-signer after you’ve paid off your loans for a few years.
3. Interest rates on loans may change
Private student loans can have fixed or variable interest rates. In the case of variable rate loans, the interest rate is linked to a benchmark rate.
If this benchmark rate remains low, your loan rate will also remain low. But if rates go up and the benchmark goes up, your student loan interest rate could go up as well. This makes repayments more expensive and it could also increase your monthly payments.
4. Private student loans don’t go away with bankruptcy
Filing for bankruptcy is often the option of last resort to eliminate debt when your finances become unmanageable due to illness or a long period of unemployment. Private student loans, however, are exceptionally difficult to eliminate in bankruptcy.
But this is also true for federal student loans. So this is a downside to consider if you are borrowing through the Department of Education or a private lender.
Compare private student loan options carefully
If you think private student loans can meet your college planning needs, be sure to research the best interest rates and loan terms. Compare rates online, then use a student loan calculator to estimate the amount of your monthly payments.