The cost of attending a college or university is staggering. The tuition at a private four-year private college averaged over $40,000 for the 2017-2018 school year. The average cost of public universities for in-state students was just over $10,000, and the out-of-state student cost to attend a public college was barely over $26,000. Furthermore, it’s projected that tuition is tripling the pace of inflation.
These high costs often push students to rely on financial aid which often means taking out student loans. The two main options in that regard are federal student loans and private student loans.
Federal student loans are funded by the federal government, while private student loans are typically available through lenders like banks or credit unions. Each year, about 1.5 million students needs to rely on private loans to cover tuition. The rising cost of college and financial aid eligibility occasionally leave gaps between federal funding and tuition, making private loans a potential solution in times of need.
While private student loans have some advantages, there are also downsides to consider. It’s important for students and their families to be aware of all of the pros and cons of private student loans.
Pros of Private Student Loans
The following are some advantages private student loans offer.
Can Cover the Cost of Attendance
With federal loans, there are limits on how much a student can borrow. These limits vary depending on your undergraduate year or graduate school status. There are also aggregate loan limits over a college education that can hinder your eligibility for future aid. Additionally, there are also limits that depend on the type of federal loan. If you’re unlucky, then you might still need funding.
With private student loans, there aren’t as many stipulations to remember. Some lenders offer loans that can cover the full cost of tuition, and others have high loan limits ranging from $75,000 to $120,000.
If a student is simply trying to cover a gap in funding, then a private loan limit shouldn’t ever be a barrier, and it can be a solution assuming he or she can qualify (see the cons).
Don’t Need to File for FAFSA to Be Eligible
Private student loans don’t require students to prove financial need, and there is no need to complete the FAFSA to indicate need. You just need to apply and qualify which is actually a whole other ball game. However, you don’t need to worry about deadlines like with the FAFSA.
Potential Interest Rate Discounts
Some private lenders offer interest rate discounts for borrowers who make auto-payments on their loans. Some private lenders also offer discounts for students who get good grades.
Chance at Lower Rates With a Qualified Cosigner
When a student is applying for a private student loan, they can have someone cosign on the application. This not only helps them with the approval process, but it could also mean lower interest rates if the cosigner has a good credit score and meets certain lending eligibility requirements.
Lower Potential Interest Rates Overall
In general, most private student loans advertise interest rates that fall below federal student loan rates. If you have great credit and solid credentials, the interest rate can end up being pretty low, which can result in lower monthly payments. You need to be able to qualify for this rate however, so there is less certainty compared to Federal options.
Cons of Private Student Loans
While there are benefits to private student loans, there are negatives to consider as well.
Higher Interest Rates
We mentioned there’s a chance to get a pretty low interest rate, but a private student loan can end up being very expensive if the borrower or cosigner has bad credit and low income. If this is the case, then there’s a good chance you’ll end up with a rate that exceeds a federal interest rate. So, you could end up paying more over time.
Some private loans can have various fees tacked onto them, such as origination fees or prepayment penalties. This isn’t the case with all private student loans, but when fees are added to the loan, the cost of education will certainly rise.
Limited Options During Financial Hardship
The biggest advantages that federal student loans have over private loans are the options during financial hardship. With federal student loans, there are different programs designed to help borrowers if they are having difficulty repaying their loan. For example, forbearance options are available, until a borrower is in a better position to make payments.
With private student loans, these options aren’t typically available, and if they are, it’s harder to qualify for them. Some private lenders may work with borrowers to create payment plans that will work for them, but they’re not obligated to do so. As a general rule of thumb, you get fewer protections with private lenders compared to the Federal government.
Cosigners Are Responsible If the Borrower Dies
If a borrower dies and has existing private student loans, the cosigner is likely responsible for repaying all of the remaining debt. In some cases, the entire balance could be due which would significantly impact a cosigners finances.
Variable Rates Can Go Up
While variable rates can be quite low at times, they can also become a nasty surprise. Variable rates are subject to change, and they are based on the current market interest rate. So if the market rate rises, then a private student loan could become more expensive with a higher rate in the middle of repayment. This just means you’re going to be paying more on a monthly basis.
Author: Jeff Gitlen
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