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Private Student Loans: Clearly Explained

Sometimes your financial aid and scholarships don’t cover the full cost of your total educational expenses. While this can be frustrating and worrisome, private student loans may be an option for potential borrowers. Read more below to know what to look for when doing your research.

Make no mistake: private student loans, also known as alternative student loans, have their own risks and rewards. These types of loans sometimes require strong credit history as well as proof of employment and income.

Generally speaking, private student loans are unsecured. This means that collateral isn’t required to borrow money for the loan. However, a cosigner is typically required for younger borrowers.

Today’s marketplace for alternative student loans is rapidly growing. More lenders means more transparency and competition for companies to keep interest rates and costs low. While this isn’t always the case, it’s easy to research companies and read real reviews. What you’ll find is not all student loans are created equally.

Pros of Private Student Loans

Let’s start with a summary of the benefits:

  • Higher borrowing limits than federal debt
  • Apply on your own time — few providers have deadlines
  • If you have strong credit history, eligible for very competitive interest rates and offers
  • A qualified cosigner can also help with the terms of your loan
  • Your interest payments may be tax deductible via 1098-T

With an alternative student loan, it’s possible to borrow up to 100 percent of your cost of attendance. Once you’ve exhausted other options, private loans can serve as additional funds to bridge the gap to pay for your education.

Candidates that apply with strong credit scores, such as graduate students or professionals considering graduate school, may qualify for lower interest rates than federal loans. But be careful: most private lenders offer variable rates instead of fixed. This means that interests rates can fluctuate over time depending on market conditions.

Cons of Private Student Loans

And let’s not forget about a few of the drawbacks:

  • Some lenders will require a qualified cosigner*
  • Most loans begin to accrue interest immediately (there are exceptions with lenders)
  • Unlike federal loans, private loans do not offer income-driven repayment plans or other protections
  • Most lenders require full-time enrollment status

As discussed above, cosigners may be advantageous for private student loans. Private loan offers are usually calculated on the basis of creditworthiness. Younger applicants and students usually don’t have enough established credit history to qualify for a loan on their own.

Unlike alternative student loans, federal loans offer more flexible repayment options for borrowers which can be useful later on in life. A number of private companies might offer deferment or forbearance, however, this is not the same as capping loan payments by a percentage of your income.

Make Timely Repayments

If you foresee yourself struggling to make payments based on future income potential, a private loan may not be for you. Private loans do not offer income-driven repayment plans or any loan forgiveness benefits.

That said, if you are going to be late on a payment, let your loan provider know sooner rather than later. Don’t wait to reach out; being proactive will be in your favor. Remember, a cosigner is also held responsible for late payments. Be sure to stay on top of your payments to prevent either of your credit scores from being negatively impacted.

When in Doubt, Apply for FAFSA

If there is one key takeaway here it is: apply for a private student loan only after you’ve fully tapped into all your options. As a first step, complete the FAFSA in order to be considered for federal students loans. Unlike private loans, no cosigner or credit check is required.

Have you considered scholarships and grants? This is money that you don’t have to pay back. Identify specific scholarships that interest you and submit an application. Set aside a few hours each week to research scholarships. Treat it like an important project and be diligent. Take calculated risks on larger scholarship opportunities — you might surprise yourself.

If you already have savings in place and are estimating how much you will need for school, calculate your college savings plan here.

Private student loans can serve as as a handy gadget in the financial tool-belt. Use them wisely after considering federal financial aid and applying for scholarships.

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