8 Important Pros and Cons of Private Student Loans
Student loans come with many benefits and can sometimes have downfalls. Learn about both in this article.
Student loans are a very common type of debt in the United States. In fact, Americans collectively owe an estimated $1.57 trillion in educational loans, according to Experian.
While the large amount of outstanding student loan debt is often represented as a crisis, the reality is that taking out student loans is sometimes a good thing for people because loans are offered at favorable terms and open up the door to getting a degree and enhance earning power.
If you're considering taking out student loans, it's important to understand that there are different kinds of educational debt out there including federal and private student loans. While federal loans can be easy to qualify for and come with affordable fixed interest rates, they often don't provide enough funding. That means borrowers end up supplementing their federal aid with private student loans.
So, what are the pros and cons of private student loans? Here's what you need to know.
Advantages of private student loans
When you're weighing the pros and cons of student loans, be sure to keep in mind these four big advantages of private loans.
Borrowers with good credit can get favorable terms
When a borrower is well-qualified, they can often get a very competitive rate on private student loans. And, in many cases, lenders offer a long payoff time and the option to defer payments while in school. Many private student loan lenders also don't charge origination fees, unlike Parent and Grad PLUS loans from the Department of Education.
Because private loans can come with good terms, they may be more affordable for some well-qualified borrowers than federal PLUS Loans are.
You'll have a choice of lenders and loan servicers
There are many different private student loan lenders competing for business.
This means you can research your options and find a lender that you're comfortable working with. You can focus on the rate they charge; their reputation for customer service; the loan repayment timelines they offer; and a host of other features.
While federal loans offer many borrower benefits, lender choice isn't one of them. You can't pick your loan servicer and every borrower gets the same rates and terms that apply to the particular loan they are taking on.
There are high borrowing limits
Private student loan lenders generally allow you to borrow enough to cover the cost of attendance, including room and board and living expenses. This means any qualified borrower should be able to get enough private student loan money to cover their school costs.
Many private lenders also have very high lifetime borrowing limits, or no limits at all. That means if you want to pursue multiple degrees or go beyond an undergraduate education, you will have the option to borrow to do that.
With many types of federal student loans, there are lifetime and aggregate borrowing limits that could fall far short of what students need to pay for school.
Private student loans may be more widely available
There are some strict restrictions on who can qualify for federal student loans. For example, many non-citizens aren't eligible. Those who drop below half-time enrollment or who haven't made satisfactory academic progress are also precluded from obtaining federal loans.
Some private lenders, however, will work with borrowers who can't get access to federal aid. For example, international students with a qualified U.S. cosigner can be approved for private loans from Juno’s lending partner.
Private loans are also available for some expenses federal loans won't cover. Common examples include bar study loans for attorneys and residency loans for medical professionals.
Disadvantages of private student loans
There are also some cons of student loans from private lenders. When you are weighing the pros and cons of student loans, be sure to think of these downsides.
Repayment is less flexible
Private student loans do not offer any options for repayment that are based on your income. Federal loans, on the other hand, offer many options for income-driven payment.
With private loans, you agree up front to pay your lender back on a set schedule and you are not allowed to change that without refinancing. With federal loans, you can change your payoff plan if you need to.
And while some private lenders offer options to put loans into forbearance in times of hardship, there are generally fewer opportunities to pause payments with private loans than with federal ones.
There's no possibility of loan forgiveness
Private student loan lenders do not forgive any portion of your loan balance if you do public service work. Nor will they forgive any remaining loan balance after you've made a certain number of payments.
Federal loans, on the other hand, offer Public Service Loan Forgiveness for borrowers in qualifying professions. And those with income-driven plans can eventually get part of their loans forgiven if they made payments for a long time and still have a balance due.
Interest may be higher, and isn't always fixed
Interest rates on private loans may be higher than the rates charged on most federal student loans -- especially for less qualified borrowers. And, while the government covers interest costs on Direct Subsidized Loans while students are in school, no private lender does this for any portion of your loan balance.
Federal student loans also come with low fixed interest rates. While some private lenders offer fixed rates, there are also variable rate loan options. These are riskier since the rate moves with a financial index and could adjust upward.
You may need a cosigner
In many cases, private student loan lenders require borrowers to have cosigners. This includes many Juno partner lenders. That's because private lenders want to see proof of income and a good credit score -- which many students don't have.
A cosigner must be someone with the right financial credentials, and they must agree to share legal responsibility for paying off your loan if you can't. It can be hard for some borrowers to find a cosigner.
You will not need a cosigner for federal student loans, and you can qualify for Direct Loans regardless of your income or credit history. Federal PLUS Loans, however, are generally not available to those with adverse credit.
The bottom line on private loans
Now that you know some of the pros and cons of student loans, you can decide if you should use them to fund your education. If you decide to borrow from a private student loan lender, Juno can help you do so at the most competitive possible rate.
Juno gets groups of borrowers together and negotiates rates on the group's behalf with student loan lenders. This can help get every would-be borrower the best possible interest rate given their financial credentials.
Christy Rakoczy Bieber
Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher with experience writing textbooks and serving as a subject matter expert.
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