Should I take Private Student Loan

Are you planning to take a private student loan? Here are the various requirements that you should know before going for it and some reasons to avoid it as well.

Updated by Roopsi Gupta on 14th October 2019

Before going for a private student loan, college students are advised to go explore the federal student loan options offered by the US Department of Education. Apart from loans one can explore options such as grants, scholarships and much more which are offered by the government as well as private institutions. But these options might not fully covered the expenses met by the students. In order to cover up these additional expenses after exploring the federal options one can seek aid from private student loans.

Nowadays it has become necessary to take one or more than one student loan to cover all the education expenses. Every year the total loans furnished goes up to $100 billion and outstanding debts on student loans goes to $1 trillion.

What attracts borrowers to student loans ranges from the relatively low fee to get a federal student loan or flexible interest rates provided by private student loan. Here is a glimpse of what actually are the key differences between both types of loans.

Table of Contents

Why you should go for a Private Student Loan?

There can be so many reasons to go for a Federal Student Loan like their fixed rates, no credit checks and many more but there are students who face so many problems in paying the tuition fees after having federal loans with them. To minimize this problem there are certain reasons to opt for a private loan rather than going for a federal loan. The reasons are as follows

Financial Gap 

In federal loans, there is a qualifying amount on how much the student can borrow each year and cumulatively during the entire duration of the loan. This can be less from the amount actually required to beat the tuition fee then private loans comes into the picture as they offer loan upto the amount which is the cost of attendance of the student. This is how private loans play a major role in paying the loan. 

Flexible borrowing options

As the interest rates differs in case of private loans because of the presence of numerous lenders in the market, the borrower has different options to take the loan unlike federal loans which offers fixed interest rate. Secondly, private loans focus more on the good credits, the eligibility criteria and other things rather than providing loans on the basis of the students needs. 

Last is the students can have flexible interest rates which says that if the earning capacity is low in the initial years they can have a lower amount of interest accrued but may get a hike in the future. 

Lower interest rates

Sometimes, it’s possible to get a rate lesser than what the federal loans are offering and the reason for that can be the high creditworthiness of that borrower or co-signer. And this can become a more cost effective deal from the borrowers end.


Situations to go for private student loans

These are the following situations when it actually makes sense to opt for a private loan than any other type of loan, these are as follows-

(i) Private Student Loan or Parent PLUS Loan

Private loans can be an option as the offer lower interest rates than the ones offered by the Parent PLUS Loans as these loans are the most expensive loans in terms of the types of loans Federal Government offers. Private loans can end up saving money of the borrower as PLUS loans offer the loan at an interest of around 7% but private loans offer an interest of around 4.264% which is low. 

Also PLUS loans are available either to parents or to the graduate students and more likely makes sense as a good credit history & credit score can help in qualifying for it. 

(ii) Limit to borrow through Federal Student Loan

Federal loans offers more protection to the borrowers but what if the borrower faces some issue in dealing with getting one as-

  • The borrower’s school is not eligible for federal loans

  • The borrowing limits are all complete

  • The borrower has lost its eligibility to qualify for the loan

If the federal loan is not filling the cost of the loan then private loan can be an option but as said, the borrower should consider all the possible aspects including gapping a year in between the education. 

(iii) Strong Post Graduation Employment Prospects

With quick search results on any topic, nowadays it is becoming very easy to go for the background check for the college to apply for graduation. It will help in clarifying so many doubts like the fees structure, the placement percentage, the curriculum and many more. 

This will be an ease to the borrowers to make their decision regarding going for private loan will make sense or not. 


Why you should avoid a Private Student Loan?

though, private student loans offer various options but there are certain areas where the borrowers might feel to avoid it and go for federal students loan. following are the reasons to avoid private student loans-

(i) Credit score requirement 

The interest can get lower in the case when the credit score is high, but if we consider the case of students who have recently graduated then their incomes are not stable and this imbalanced the credit history and credit score. All of this make the students pay higher interests and nowadays maximum borrowers are dealing with this issue  

(ii) Variable Rate may not save money 

As private loans are available with both fixed and variable rates, to lower the interest in the beginning, the more it will be beneficial for the borrower. But in the long run the interest will definitely increase which will create trouble to the borrower in paying out the loan. 

(iii) Repayment & Forgiveness Options are less 

In case of federal loans there are several loans available so that if the borrower is facing certain kind of issue in repaying the loan, the lender can help them in providing various repayment options or sometimes they offer forgiveness plans after making certain payments on the part of borrower. 

Private loans offers loan assistance program which is again on the part of lender if they want to ease the repayment options for borrowers.  


How to pick the right lender for private loans?

Proper research on what the market is offering you in terms of the interest rates, the duration of the loan, and other related things is one of the important key if you have decided to go for a Private Loan. 

Using school's financial aid office - Consulting with the school’s financial aid office to help the students get is one option to go for. Also schools have some connected lenders that may offer special discounts on interest rates and flexible on other terms as well. This can be beneficial for the students to get a quick private loan. 

Exploring options - Apart from this, there are some lenders who give a check on various options available for private loans. The important thing to note is that one should not get the details of one lender and pursue with that, they should go for multiple lenders, optimize them according to the requirements, then decide and opt for the one. 

The major reason for all the research is one point that if in any case you have opted for the loan which in future will not be meeting your requirement then it’s difficult to get the plan change.


Risks associated with Private Student Loan

Already, with very less count on students opting for private student loans, they should be careful enough while going for it. Sometimes even without checking for the eligibility for Federal Loan, students go for the private loans, but this can be a risky step to take. 

Like this there are several other risks which are involved while going for a Private Student Loan-

  • There are students who are not aware of the federal aid they are having and they flip to private loans. Their federal funds left unused this way and this is how the students lost the funds present. 

  • With different options available for repayments, still students may find it difficult to pay the loan amount. They should check with the lender if there is forbearance option present in their loan program. 

  • If the co-signer is also in the loan, ensure to have a good credit history. Also maintain both the credit history and terms with the co-signer so that you can easily repay the loan on time easily.

  • It’s necessary to note all the important points regarding the conditions of loan which also includes the terms on default. Give a check on to avoid default and maintain a fund aid so that if it happens, the risk can be minimized. 


How do I qualify for private student loans?

Generally all the private lenders have the same steps to make a borrower qualifies for a particular loan, though they may have different standards to track the borrower but in the end what is required are two main factors to consider for eligibility 

(i) Good Credit Score- credit score lies between 850 to 300. The higher it is the more there are chances for the student to get the loan deal done. But by any chance if the score is less than 700 the probability to qualify lowers down but if in any case it goes to 650 or less then it’s almost not possible to get that loan. 

It’s important to maintain a credit history and a good credit score at the same time so that there will be more chances for the results to be in favour.

(ii) Cosigner- While applying for a private loan via a bank, the basic need is to have a cosigner. The co-signer is more like a guardian but that can be any person who has the capacity to be the support in case the student is not able to pay the loan for the time being. Majority of loans are taken via banks with a cosigner with it. Another is the cosigner is as liable to pay the loan as the borrower is. 


How do I repay Private Student Loan?

The basic term to repay the private loan is 7 to 15 years, again it depends on which lender the students are going to get it from. With a limited number of options available on repayments with private loans, if the students are not able to make the payments then refinancing is the option that they can go with. The maximum duration in terms of refinancing goes till 30 years and the rest depends on the debt that the student has taken. 

Obviously, it will make the amount less but it will increase the number of installments to repay it out. Even some lenders offers deferments, but it is rare option available with the lenders. 


Difference between Federal Student Loans & Private Student Loans

The loans offered by the government of US are known as the Federal Student Loans. This is the type of financial aid that you can qualify by filling the Free Application for Federal Student Aid (FAFSA) form in the year to want to apply at. What is good in this type of loan is the interest rate, different fees and other clauses are the same for all borrowers as their regulatory body is the government itself. 

Credit check requiremnets - The requirement of credit check is also not there with these types of loans. Federal Student Loans are different from the grants, scholarships that the government offers, as they need to be paid back with some percent of interest. 

More options for borrowers - Private Students Loan can be offered by various institutions, banks, agencies and many more. As their lenders are different and have different market values. Being from the private sector, they do have a fix eligibility requirement which makes the borrower follow specific set of steps to get a desired loan. 

Cosigners - In order to get a private loan, it's important to have a good credit score or a co-signer as the case may be.  Few examples that offers Private Student Loans are Citizens Bank, Discover, Credible and many more. 


Conclusion

Like every situation has two sides- good and average. Same is with the question that should an individual go for a private student loan, there are various advantages of going for a private loan what matters is the borrower’s repaying capacity, the credit score they hold, the cost that they can bear in terms of taking loan and many more.

If on any part they feel that their income will not be supportive with the loans than they should try other options like the federal loans. But need to remember one thing that in any case if the loan is in default, the borrower has the right to protect themselves.