The Pros and Cons of Private Student Loans

Pros and Cons of Private Student Loans - Should You Get a Private Student Loan

It’s that time of the year when high school seniors eagerly await their acceptance letters and parents nervously wonder how much college is going to cost them. Before you consider borrowing, let’s review the pros and cons of private student loans. Even those who may have put away some money through a 529 Plan or another college savings account may find that it’s simply not enough to cover all their expenses, even after they factor in federal financial aid and scholarships. When this happens, students and parents may need to make some tough decisions.

The Pros and Cons of Private Student Loans

They can look into schools that may cost less, such as community colleges or in-state public colleges, or they can consider another option – private student loans. But, before students and parents make the decision to take on additional student loan debt, they should take a close look at the pros and cons of applying for a private student loan.

PROS of Private Student Loans

  •  Unlike most federal student loans (excludes PLUS loans), which are limited in size, private student loans may cover to the total Cost of Attendance (COA) minus any awarded financial aid.

  •  In some cases, borrowers may receive a lower interest rate through a private loan lender than what is currently offered through the federal Direct Loan program.

  •  Borrowers may receive additional discounts, such as a reduction for good grades or automatic payments, which can also reduce their interest rates.

  •  Application processing and disbursement of funding tends to be much shorter for private student loans, which is especially helpful for those who need their money in a short period of time.

  •  Parents who have good credit, but don’t want to be the primary borrower on the loan may see private student loans as a good alternative to a PLUS Loan, home equity, or credit cards.

  •  Cosigners may often be able to be released from the promissory note after the student makes a number of on-time payments and can meet other requirements set by the lender.

CONS of Private Student Loans

  •  A credit check is required before a loan offer will be made.

  •  Many private loans may also require a cosigner with a good credit rating (720 or higher).

  •  Interest is often variable, so the rate can increase or decrease over the life of the loan rather remaining constant.

  •  Borrowers may be required to make interest payments while in school.

  •  Repayment plans are less flexible than those offered through the federal Direct Loan program.

  •  Deferment and forbearance may not be available to borrowers who are having difficulty making their payments.

  • No federal subsidy which means interest may not accrue while you’re in school or during a grace period. However, with private student loans your interest accrues from the first day. Unlike federal student loans, private lenders may not suspend student loan payments during economic downturns.

Although the negatives may seem to outweigh the positive aspects of taking out a private student loan, it is still a viable alternative for students that need to cover the funding gap. Students can minimize their overall debt by limiting their total borrowing to no more than one year’s anticipated salary after graduation and paying the interest while they are in school. They should also continue to apply for scholarships, as this may help reduce the need for private loans in subsequent years.

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