The cost of education has been rising exponentially, forcing students and their families to seek financial assistance. It is widely reported that the cost has more than doubled over the last few years. For example, the average cost of college in the USA is $38 270 per student per year. This is where student loans come in handy.
While federal loans are often the preferred choice because of their favorable terms and protections, they might not always cover the full cost of fees, tuition, and living expenses. If you have already exhausted your allotment of federal loans and other free funding sources, private loans can be a viable option.
Private student loans are popular because they come with higher loan limits, and the cost of borrowing is sometimes lower compared to federal counterparts. However, this does not mean private student loans come without limitations. It is critical to carefully weigh the pros and cons before deciding to apply for a student loan.
Pros of private student loans
- Borrowing limits are higher than federal student loans
One of the primary advantages of applying for private student loans is you can borrow a lot of money that might not be possible with federal loans. Typically, federal loans for students have aggregate and annual limits that might not cover the cost of total attendance, especially if you are planning to attend expensive graduate programs or private colleges.
On the other hand, private lenders offer loans that might cover up to 100% of your school-certified cost of attendance, including books, supplies, room and board, tuition, and other educational expenses.
- It might be cheaper than federal student loans
If you are an undergraduate student, it is unlikely you will find anything cheaper than a federal student loan, especially if you have not built a good credit history. Even then, the final cost is higher due to the interest rates and the upfront loan fee that federal loans require.
The advantage of private student loans is that the lenders do not usually charge an upfront fee.
Depending on your specific situation, it would be good to compare federal and private student loans before making your decision. You might be able to secure a better deal by applying for a private student loan.
- Faster application and disbursement process
Compared to federal loans, the application process for private student loans is typically faster. Most private lenders offer online applications, and the decision to approve the loan is made within minutes. Once the loan is approved, the funds are quickly disbursed. So, if you are in a hurry, private student loans are a good option.
- The interest rates are potentially lower
Do you have a strong credit? Or a creditworthy cosigner? If so, you may qualify for a private loan with a much lower interest rate than federal loans.
As you might know, federal interest loans are set by Congress and apply to all borrowers. On the other hand, private lenders offer interest rates based on the credit profile of the borrower. Hence, if you have excellent credit, you might be able to get a lower interest rate and save significantly over the life of the loan.
- The loan options are flexible
Private loans come with different options, allowing borrowers to tailor the student loan according to their specific needs. For example, some private lenders offer both variable and fixed interest rates, giving borrowers a choice between predictable monthly payments or one where the payments fluctuate according to the market conditions. Furthermore, private lenders might offer varying payment terms, ranging from five to twenty years. This might allow you to choose a repayment plan that best suits your financial situation.
- Open to students who don’t qualify for federal loans
If you are not eligible for student federal loans, you can opt for private student loans.
Drawbacks of private student loans
- Interest rates are decided on the basis of creditworthiness
In some cases, you might qualify for lower interest rates compared to federal loans, but this is not always the case. Unless your credit score and income are stellar, you might end up with a much higher rate than you want.
- Stricter repayment terms
Unlike federal loans, repayment terms for private student loans are much stricter. It might be harder for you to pay back the loan if you suddenly face financial hardships.
Moreover, private loans are not eligible for forgiveness programs, but federal loans are.
- Lack of federal subsidy
If you are an undergraduate student with financial needs, you might qualify for subsidized federal student loans. With such loans, the government pays your interest while you are in school and also during future deferment periods.
On the other hand, there is no subsidy for private loans. This means you are on the hook for all the interest accruing on your debt.
- Risk of overborrowing
Private loans can be accessed at an amount equivalent to your total attendance cost. While this provides you with the cushion required to cover the expenses of your higher education, it also means there’s the risk of borrowing more than you actually need. Plus, you might be stuck with steep monthly payments that might make it difficult for you to enjoy your academic life.
Conclusion
There’s no denying that private student loans can be valuable financing for your education, but it is essential to understand your financial situation to decide between federal and private student loans. However, if you have exhausted your federal borrowing limits or require additional funding, private student loans are the most viable option.
Before applying for a private student loan, weigh the pros and cons carefully. While private student loans offer potentially lower interest rates and higher borrowing limits, they come with stricter repayment terms and might not be eligible for federal loan forgiveness programs.
Compare the repayment terms, interest rates, and fees offered by various private lenders to make an informed decision. Plus, don’t forget to analyze your financial situation, credit history, and long-term financial goals.
Also Read: 8 Ways Why Canceling Student Loans is Advantageous
