For millions of college students, taking on student loan debt is not an option. Without it, the cost of college tuition would be beyond the reach of most families. This year, students will leave college with more than $30,000 in student loans and many will have trouble making their loan payments at some point in the future. With federal student loans, they have some options that can help get them through difficult times – forbearance, deferment and flexible repayment plans. However, this is not so with private student loans. Students with private loans have to sink or swim with the loan terms they have, which includes no forbearance and no repayment options.
In the context of the massive amount of student loan debt engulfing the U.S., private student loans play a smaller supporting role. Of the $1.4 trillion in outstanding student loans, about $150 billion are private student loans. But, for the 1.4 million students who take out private student loans each year, their financial future can turn out very different than if they had taken out a federal student loan instead.
Why Students Use Private Loans
For many students, private student loans do play an important role in financing their college education. Once a student exhausts all available federal options and still needs funds to cover college expenses, say, room and board, a private loan can fill in the gap. Under those circumstances, a private loan should only be big enough to cover the extra expenses. However, about 70 percent of students who take out only private loans do so because they are not informed of their other options. Of those students who used both federal and private loans, nearly half borrowed less than they could have in safer federal loans.
The key takeaway is that students and parents need to take all the time necessary to inform themselves of their options, especially in terms of their eligibility for federal financial aid. If they think they have a need for a private student loan, they should definitely learn all they need to know about them. Here are five things you need to know about private student loans before signing on the bottom line.
Private Loans Don’t Include Borrower Protection
The most important thing to know about private student loans is they do not have the mandatory borrower protections that come with federal loans. That includes deferment and forbearance options as well as extended and income-based repayment options. Some lenders may offer loan deferment, but it is typically done on a case-by-case basis. And, because private lenders do not offer loan forgiveness under any circumstance, if you get behind on a private student loan, you will be on the hook for as long as you live. Very few lenders will ever agree to a loan discharge, even in the event of a disability.
Many Private Loans Don’t Include a Grace Period
With most private student loans, payments must start once the loan is issued. With federal student loans, payments aren’t required until six to nine months after leaving school. That grace period is critical for college grads who need that time to secure a job. There are some lenders who do offer a grace period, but loan interest begins to accrue from day one of the loan.
Variable Rates Can Cripple You
Federal loans come with fixed rates, making it much easier to predict monthly payments. Many private loans come with variable interest rates. While they can seem very attractive in the beginning, they could easily double or even triple over the length of the loan term. Some lenders offer fixed loans and some may allow borrowers to convert their variable rate loan to a fixed loan. You should avoid, at all costs, variable rate private student loans.
You Need Good Credit to Qualify
With federal student loans, the only eligibility requirement is based on financial need. There are no credit checks. With private student loans, the student or a cosigner will need to qualify based on their credit and financial status. The lowest private loan rates are reserved for the most creditworthy borrowers. So, if you do end up qualifying for a loan with less than great credit, you will be stuck with a much higher loan rate.
You Will Probably Need a Cosigner
The reality is 90% of private student loans require a cosigner. Cosigners take on equal responsibility for loan repayment. Should the student borrower fail to make payments, the lender can go after the cosigner, which in most cases is a parent. A few lenders offer a cosigner release which takes the cosigner off the hook if the student borrower makes on time payments for a certain period of time. However, the lender may require borrowers to be able to qualify for the loan on their own before agreeing to a release. Less than 1% of cosigner release requests are approved.
Private student loans can play an integral role in helping students fund their college education. However, the overwhelming consensus is that students should fully exhaust all possible options in maximizing their federal and state aid. Under certain circumstances, many colleges will step in and either find ways to reduce expenses or supplement federal aid with a college or private grant. Leaving college with student loan debt can make life difficult. There is no reason to increase your burden, if you don’t have to, with an unmanageable private student loan.
This article was contributed by guest author Jennifer Loews.