If you need to take out student loans to pay for college, you have two main options. You can either take out a federal or private student loan .
While federal student loans get a lot of attention, you may not be as familiar with private student loans and how they work. In this guide, provide a definition of private student loans and explain their advantages and disadvantages.
What is a private student loan?
A private student loan is simply any loan that is not made by the government.
Private student loans are issued by a variety of lenders, z. B. from community banks, credit unions and online lenders. Government agencies and schools may also offer private student loans.
How private student loans differ from federal loans?
After you know the basic definition for private student loans, you need to know the various differences that distinguish them from federal loans.
Repayment plans and student loan forgiveness
Private student loans are not able to meet many of the federally funded benefits, repayment plans, or forgiveness options.
You cannot participate in an IDR (Income Driven Repayment) plan or qualify for public loan forgiveness (PSLF) with a private student loan.
Private student loans have higher annual loan limits than federal student loans. With federal student loans, you cannot borrow more than 57.$500 as a student and 138.Borrow $500 for graduate students (including what you borrowed as an undergraduate).
However, with many private student loan lenders, you can borrow up to 100% of your tuition costs. This can make private student loans an overflow option for students who have exhausted their federal loan options and still need more funding.
If you qualify for a subsidized federal student loan, the government pays your interest while you are in school.
There are no subsidized private student loans. You must pay all interest yourself.
Terms and conditions for federal student loans are set by law. However, private lenders are free to set many of their own rules.
That means private student loans might differ from federal student loans in the following ways:
- When payments begin: Most federal student loans do not have to be paid until after you graduate from school and have exceeded your six-month grace period. Many private student loans require payments to begin immediately after the loan is disbursed.
- Credit check: most federal student loans do not require a credit check, but most private student loan lenders do.
- Prepayment penalty: federal loans do not have a prepayment fee, while some private loans may.
It's important to note that private lenders vary widely in the rules and benefits they offer. Many private student loans do not have prepayment fees associated with them. And if you choose one of the best private student loan lenders, you may have an interest payment option or full deferment while you're in school.
How you can get a private student loan?
To obtain a private student loan, you must apply to a private student loan lender.
As mentioned earlier, many private lenders review your student loans. It's also common for them to require proof of income. If you don't have good credit or income, you may need to find a cosigner to qualify.
If you want to take out a private student loan, shop around to make sure you get the best deal. To get started, compare the pros and cons of private student loans .
You may also want to use comparison tools like Credible to help you find the best deal for you.
Do private student loans have lower interest rates?
The ability to get a lower interest rate with a private student loan depends on what type of loan you take out.
Direct student loans
For the 2019-2020 academic year, the interest rate for Direct Subsidized Loans and Direct Unsubsidized Student Loans is 4.53%.
It will be difficult for any private loan to beat this interest rate, even if you (or your cosigner) have amazing credit. If you received an offer for a private loan with a lower interest rate, there's a good chance it could be for a variable-rate loan .
Direct Graduate and PLUS Loans
However, private student loans have a better chance of outperforming federal student loans for graduate and PLUS loans.
Starting in August 2019, federal direct unsubsidized graduate loans will have an interest rate of 6.08%, and PLUS loans will be set at 7.08%. If you have a healthy income and a good credit score, one of the best private student loan lenders may offer you an interest rate below 6%.
Depending on the lender you choose, you may have a few repayment options to choose from. For example, CommonBond offers four options to private student loan borrowers:
- Deferment: you don't make payments until after you graduate.
- Fixed payments of $25: you pay $25 each month until you graduate.
- Interest payments: You pay interest on your student loans while you're in school, but don't make payments to the principal until after you graduate.
- Full payments: You begin making full principal and interest payments immediately.
Keep in mind that the first two options accrue interest while you are in school, and that interest is capitalized once regular payments begin. Interest payments can be a good choice if you want to avoid interest capitalization .
Common repayment periods for private student loans include five, seven, 10, 15 and 20 years. This gives you a great deal of flexibility in choosing the repayment period you are most comfortable with.
Note, however, that unlike federal student loans, you cannot change your repayment plan later through private student loans.
Advantages and disadvantages of private student loans
Here are some of the pros and cons of private student loans you should consider:
- Higher loan limits: if you attend an expensive private school, you can exceed your total federal student loan limit pretty quickly. Private student loans, however, can help close the funding gap.
- Strong credit lowers your interest rate: If you have good credit, you can't do better with federal student loans. But with private loans, you'll be rewarded for being responsible with credit.
- Private loans adhere to your state's statute of limitations: conversely, there is no statute of limitations on federal student loans. If you default on federal student loans, the government can garnish your wages and tax refunds. Federal loans will never just go away.
- You lose federal student loan benefits: Benefits such as income-driven repayment (IDR), interest subsidies, and loan forgiveness programs like PSLF and teacher loan forgiveness are no longer available through private student loans.
- They lose out on hardship options: These options include deferment, forbearance, and student loan forgiveness for death and disability. The latter two are a big deal because it can be very difficult to repay student loans if you are permanently disabled, and no one wants their student loans to follow them to the grave.
Fortunately, many of the best private student loan lenders Now offer death and disability forgiveness, as well as some forbearance and deferment options. This is another reason why it's important to shop around before choosing a private lender for student loans.
Generally, you want to maximize federal student loans before turning to private loans. And if you must take out private student loans, make sure you do your homework. Compare interest rates, repayment options, and other benefits offered by private lenders to help you find the best deal.