Paying for college can feel overwhelming for students and parents alike. Many people have heard warnings about private student loans, with concerns about high interest rates, difficult repayment terms and lack of protections compared to federal student loans. But are private student loans really as bad as they're made out to be? The truth is, private loans can be a smart financial tool if used wisely — especially when you choose the right lender.
In this article, we'll debunk common myths about private student loans, help you understand when they might be a good option and give you tips on how to choose the right one. With some research and careful consideration, private student loans can actually help bridge the gap in your college funding without the horror stories often associated with them.
Common Misconceptions About Private Student Loans
There are many misconceptions about private student loans that can cause unnecessary anxiety. Here are a few common myths, debunked.
Myth 1: All private student loans have sky-high interest rates.
While some private lenders may offer loans with higher interest rates, this is not true across the board. In fact, many nonprofit lenders and credit unions offer competitive, lower-interest loans — sometimes even lower than federal PLUS loans.
Myth 2: You're on your own with private loans — no safety nets or protections.
While federal loans offer certain protections (like income-driven repayment plans), some private lenders also offer borrower protections like temporary assistance if payments can't be made (known as a deferment or forbearance), flexible repayment options or loan forgiveness in special circumstances. It's important to choose a lender that provides the right balance of support and flexibility.
Myth 3: You'll always need a cosigner.
While many students need a cosigner to qualify for the best rates, especially when they're just starting out, some private lenders allow students with strong credit histories to apply on their own. Always check with individual lenders to see their specific requirements.
Understanding these facts can help ease some of the apprehensions surrounding private student loans and empower students and parents to explore all their options.
The Differences Between Federal and Private Student Loans
Federal student loans are the recommended first stop for students who need loan funds, and for good reason: they come with built-in protections, have lower fixed interest rates, and don't require a credit check (except for PLUS loans). However, federal loans have funding limits, and for many students, they may not cover the full cost of tuition and living expenses after accounting for other financial aid and resources.
Here's how federal and private loans differ.
Federal Loans
- Fixed interest rates: These rates are set each year after the 10-year Treasury Note auction in late May and are the same for every borrower.
- Flexible repayment options: Federal loans offer income-driven repayment plans, deferment and forbearance options if you're facing financial hardship.
- No credit check (except for PLUS loans): You don't need to have an established credit history to qualify for most federal loans. For PLUS loans, applicants with adverse credit histories can apply with an endorser.
- Loan forgiveness programs: Some federal loans are eligible for forgiveness if you work in certain professions (e.g., public service).
Private Loans
- Variable or fixed interest rates: Depending on the lender, you may be able to choose between fixed and variable rates.
- Limited repayment flexibility: While some private lenders offer options like deferment or forbearance, these are typically more limited than what's available with federal loans.
- Credit-based approval: Private loans usually require a credit check, and your interest rate will depend on your creditworthiness. Having a cosigner can help secure a better rate.
- No federal protections: Private loans do not qualify for federal loan forgiveness programs, so it's important to plan your repayment strategy carefully.
- Private student loans cannot be consolidated with federal student loans through federal loan consolidation.
Federal loans are typically the first step, but when they're not enough, private loans can offer the additional funding needed. Just be sure to compare lenders, loans and terms carefully.
How to Choose a Private Loan Wisely
Not all private student loans are created equal. Choosing the right one requires doing your homework. Here are key factors to consider when selecting a private loan.
Interest Rate
- Does the lender offer both fixed and variable rate options?
- Fixed rates offer stability and can make budgeting easier in repayment since the minimum monthly payment typically is a set amount.
- Variable rates fluctuate with market conditions, which means payments also change during repayment. Variable rates might start low but can increase significantly.
- Compare both options to determine which makes more sense for your financial situation and what risk level you're comfortable with.
Repayment Terms
- Does the lender offer flexibility, such as interest-only payments or smaller set payment amounts while in school? Do they offer deferment options and different repayment plans in repayment? Is there a grace period after graduation and can you prepay with no penalty?
- Consider the repayment term length (e.g., 10, 12 or 15 years) and the total amount of interest you'll pay over time. (Hint: The longer the repayment term, the more you will pay in interest, but your monthly payment amount will be higher with a shorter repayment term.)
Customer Service and Borrower Support
- Look for lenders with positive customer reviews and excellent support. Some lenders provide tools and resources for financial planning, as well as responsive customer service for when you have questions or run into financial issues.
- Real customer feedback, such as those shared on Trustpilot and other review websites, can provide valuable insight into the lender's reputation.
Benefits
- Are there rate discounts for making automatic payments?
- Does the loan have an option to release cosigners from their financial obligations and is that benefit obtainable?
- Does the lender offer resources beyond the loan, like free access to scholarship tools, financial literacy content or college planning tools? Choosing a lender that cares about your success, not just your loan, can make a big difference.
By carefully comparing these aspects, you can be certain you're choosing a private student loan that works for your financial needs — without unwanted surprises down the road.
The Benefits of Private Student Loans with the Right Lender
Private student loans, when obtained through the right lender, can be a useful tool to pay for college when used for the right purposes. Here are a few reasons why private loans should not be dismissed outright.
Lower Interest Rates than You Think
Many people believe private loans are inherently expensive, but some nonprofit lenders and credit unions offer interest rates that are competitive with — or even lower than — rates offered by for-profit lenders and the federal PLUS loan. For example, when a nonprofit organization offers lower-interest private loans, they can save students and parents significant interest costs over the life of the loan compared to other national lenders.
Students and families can make more informed decisions when it comes to choosing a private loan by pre-qualifying. This step allows you to see the rates you would receive without completing an application and usually with no impact to your credit score. Some lenders also have options for cosigners to pre-qualify. If a lender doesn't offer a pre-qualification option, take a moment to think about what that might mean.
Additional Financial Resources
Some private lenders go beyond loans, offering scholarships, free financial planning tools and even personalized assistance. This extra support can make a big difference in helping students and families avoid overborrowing and stay financially healthy throughout their higher education journey.
Flexible Repayment Options
While private loans may not have the extensive repayment options of federal loans, many lenders still offer some level of flexibility. For instance, you might be able to make interest-only payments or postpone payments while in repayment for a short period if you're facing financial difficulties.
When Private Loans Can Be a Good Option
There are specific scenarios where private loans can be a smart choice. Here's when private student loans might be beneficial.
When Federal Loans Don't Cover Everything
The reality is that federal loans, with their pre-set limits, may not fully cover the cost of tuition, room and board, books and materials, and other college expenses even with other financial aid and resources, such as your savings. In this case, private loans can help fill the gap. Students with good credit or a strong cosigner can secure lower interest rates that make private loans a viable option.
For Students or Parents with Excellent Credit
If you (or a cosigner) have a strong credit history, you may qualify for a private loan with a better interest rate than some federal loans, particularly the federal PLUS loan, which often has a higher interest rate and upfront fee. Some private lenders offer loans with lower rates and better terms than the PLUS loan, making it a more affordable option for parents or graduate students.
When Seeking Flexibility in Loan Terms
Some private lenders offer a variety of loan terms — both in repayment length and interest rate structures (fixed or variable). This flexibility can help borrowers find the right loan to fit their financial circumstances.
While federal loans should be the first option for most students, private loans shouldn't be discounted, especially if you can secure a lower rate or more favorable terms.
Key Takeaways
Private student loans can be a valuable tool for paying for college — if chosen wisely. Here's what you should remember.
- Do your research: Compare interest rates, terms and benefits from various lenders. Look beyond the large national lenders to nonprofit organizations and credit unions that may offer more affordable options.
- Use federal loans first: After taking advantage of scholarships, grants and federal work study, federal student loans should be your next choice for covering costs. But don't be afraid to consider private loans if more funding is needed.
- Choose the right lender: The right private loan can help make college more affordable. Look for lenders that offer competitive rates, flexible repayment options, and additional resources like scholarships or financial planning tools.
Ready to explore your options? At ISL Education Lending, we offer competitive, lower-interest private student loans, plus free tools to help you plan smart and pay less for college. Compare our rates today and see why so many students and parents choose us for their college financing needs. Whether you're looking for scholarships, loan calculators or personalized assistance, we're here to help you every step of the way.
