Paying for college can come with a high price tag. According to CollegeBoard, the average cost of tuition, fees and room and board at public, four-year universities is $21,950. That costs rises to $49,870 for students attending private colleges.
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While federal loans can help you cover education costs, there's a limit to how much you can borrow each year. Taking out a private student loan can help when the financial aid package offered by your college doesn't meet your total cost of attendance. Before taking out private student loans, it's important to consider the pros and cons.
Pros of a private student loan
First, let's look at what's good about using a private student loan to pay for college when your financial aid runs short.
1. Higher borrowing limits
The Department of Education caps the amount of money you can borrow with federal student loans. That could make paying for college difficult if you're attending a pricier school to earn your undergraduate degree or you're getting ready for graduate school.
Some of the best private student loan lenders may allow you to borrow up to 100% of your education costs which can relieve any worries you might have about being able to cover your tuition, fees, and other expenses while in school. If you've hit your limit as a federal student loan borrower, visit Credible to explore private student loan options.
2. Possible lower interest rates
One key characteristic of a federal student loan is that you typically enjoy a low fixed rate. But thanks to the Federal Reserve's decision to cut interest rates to near-zero, private student loan interest rates are approaching all-time lows.
That's a good incentive to get a private student loan sooner rather than later. And if your parents are helping pay for school, private student loans may yield lower costs compared to federal PLUS loans.
If you haven't checked out private student loan rates lately, that's a must. Credible makes it easy to compare both fixed interest rate loans and variable interest rate loans from different private lenders in one place without affecting your credit score.
3. Some lenders offer special incentives
Your choice of private student loan lender matters since some lenders can offer other benefits beyond low-interest rates. For example, your lender may let you temporarily defer making payments if you lose your job or offer career counseling to help you find your next gig.
Use Credible to compare lenders and see what each has to offer.
You may also be able to take advantage of other benefits, like an interest rate discount when you enroll in automatic payments or the option to skip a payment once per year if your account is in good standing. And some private student loan lenders offer flexible repayment options so you can choose a payment schedule and plan that fits your budget.
Those are small things but they could make a big difference when it comes to managing your student loans.
4. Qualify for private student loans if you lose federal loan eligibility
Defaulting on a federal student loan or falling behind on your academic progress requirements could cause you to become ineligible for new federal loans. Private student loan lenders, on the other hand, don't necessarily require satisfactory academic progress or full-time enrollment to be eligible for loans.
They do, however, require a good credit score. So if you've defaulted on a federal loan and that's been reported to the credit bureaus, you may need a cosigner to get private student loans.
Credible can show you what kind of rates you qualify for today with your current credit score — just plug it into their free online tools.
Cons of a private student loan
Now that you know the advantages of private student loans, consider some potential downsides.
1. Loss of repayment options
One key feature of federal student loans is the option to choose income-driven repayment. An income-driven repayment plan that determines your payments based on your income and household size can help ensure that you can afford what you have to pay. Income-driven repayment is also required for federal student loan forgiveness.
Private student loan lenders are not required to offer income-driven repayment. While some may offer flexible repayment options or temporary hardship programs, they're not obligated to. So if you lose your job, you could find yourself in a tight spot financially if repayment options for private loans are limited.
2. You may need a cosigner
If you don't meet a private student loan lender's credit score requirements you may need a cosigner to get approved. This can be a downside if you have a hard time finding a creditworthy relative or friend who's willing to sign their name to your student loan debt.
On the other hand, having a cosigner for a private student loan could work in your favor if they have a great credit score. Your cosigner's credit history could help you qualify for the best rates. And depending on the lender, you may be able to apply for cosigner release after paying down your loans for a few years.
3. Loan interest rates may change
Private student loans can have fixed or variable interest rates. With variable-rate loans, the interest rate is tied to a benchmark rate.
If that benchmark rate stays low, then the rate on your loans stays low as well. But if rates rise and the benchmark adjusts upward, the interest rate on your student loan could also increase. That makes paying them back more expensive and it could also increase your monthly payments.
4. Private student loans don't disappear with bankruptcy
Filing bankruptcy is often the last resort option for eliminating debts when your finances become unmanageable because of an illness or extended period of unemployment. Private student loans, however, are exceptionally difficult to get rid of through bankruptcy.
But that's also true of federal student loans. So this is a con to consider whether you're borrowing through the Department of Education or a private student loan lender.
Compare private student loan options carefully
If you think private student loans may fit your needs for college planning, be sure to shop around for the best interest rates and loan terms. Compare rates online, then use a student loan calculator to estimate how much your monthly payments might add up to.