What You Need to Know About Private Student Loans

By Madison White on May 10, 2017

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With high tuition rates across the country, funding your education can seem like a minefield. There are many options when it comes to financing your future from government loans to grants and scholarships.

Did you know that you can also take out private student loans? For some students, private student loans are an important option to have when budgeting their higher education. However, private loans do come with a few tips and tricks that will keep you out of repayment trouble.

Before you make any decisions on private student learns, here is some important information about how they work and whether or not they will work for you.

Protections private loans may not have

Private loan details are set by the lender meaning that they may not come with the protections offered by the federal government. Government loans have deferment and forbearance options so that someone who may drop out due to unforeseen circumstances won’t be saddled with debt immediately. Private lenders, however, may not have this.

Federal loans also have a six to nine month grace period before students must begin repaying their loans. Again, private loans may not have this. If you’re considering private student loans, make sure that you know exactly what your lender’s policies are so you don’t get stuck in a bad situation. Nobody wants surprise payments that they aren’t ready to pay.

Private loans may cost more

Federal loans are designed to offer students the most affordable way to pay for their education. Private lenders are usually part of a business that is looking to sustain itself. In total, private loans almost always end up costing more than federal loans. The rates are considerably more variable and sometimes they’re even designed to trick you.

Some private loan rates will start out very, very low to convince you to sign on, but in the years after, the loan rate could double or even triple. This means you’ll end up paying a larger amount of money than you probably originally thought. Federal loans, however, always have a fixed rate that isn’t subject to change over the years.

It depends on your score

Loans are often determined by someone’s credit score, and since many undergraduates haven’t had enough time to foster and develop a good credit score, this means that the responsibility usually falls on someone else. Whoever the cosigner is then takes the risk of debt should you not be able to keep up on your loan payments.

On the other hand, if you have limited options for co-signers that don’t have good credit history, you may end up paying more for your loan or you may not even qualify for the loan at all. For students who are independent and want to rely on themselves for financing their education, this can make the option of private student loans very costly or not an option at all. Federal student loans do not take credit scores into account when deciding loan rates and will not deny them to students should they qualify.

Private loans may offer more money

For some students, student loans may look even more enticing because at the time, they seem like free money. Student loans, however, are not free money and frequently, the college years go by much quicker than students anticipate. Federal student loans have limits on how much students can borrow so that their debt doesn’t become astronomical.

Private loans do not have such limits. Some lenders may have caps, but others may allow students to take out as much as they want. This enticing deal may tempt students to take out more than they actually need to and leave them with a large repayment.

The silver lining

Fortunately, tax cuts are available for both private and federal student loans. This can be a huge bonus because families with student loans can deduct the interest from their student loans, up to $2,500 each year. However, this is a combined total, so if the total interest from both your federal and private loans amounts to more than $2,500, then taking out money through private loans won’t be of much help to you. What it does mean is that private student loans aren’t completely void from some of the benefits that federal student loans have.

When deciding whether or not to take out private student loans, make sure to think about all the above factors. Really attempt to determine what your student budget needs to be, how much federal financial aid you’ll be receiving, and what remains. Be sure to talk with anyone that will be involved in the student loan process with you, including your parents and potential lenders. They’ll be able to talk with you about realistic costs and what your loans will look like in the future.

Private loans are a great option for some people and it is definitely worth it to consider them for your financial student future.

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