How Private Student Loans Work
Private student loans work like most other types of loans. You check a lender’s eligibility requirements and apply for the student loan that looks like a good fit. If approved, you will receive a lump sum to pay for your education program and related expenses. You will repay the loan, plus interest, over a set term. For example, Citizens Bank offers undergraduate student loans up to the total cost of education or the maximum qualified loan amount, whichever is less. The bank offers a range of interest rates that depend on your qualifications, but once you get the loan, your rate is fixed. Repayment lengths range from five to 15 years, and interest-only payments are options for a period while students are in school. To qualify, you’ll need to meet a few requirements, including being enrolled at least half-time in a degree-granting program at an eligible institution. If you don’t qualify based on your credit, you’ll need a qualified co-signer. While private student loans may sound like a decent offering, before pursuing them, it’s a good idea to see how much help you can get from the federal government. The U.S. government’s Federal Student Aid department has several grant and loan programs in place with terms and benefits that are hard to beat. To see if you qualify, fill out the Free Application for Federal Student Aid (FAFSA). If you have leftover expenses, private student loans can help you bridge the gap.
Federal vs. Private Student Loans
Federal student loans offer several advantages over private student loans. In short, private student loans are generally more expensive and come with fewer benefits for the borrower. Here’s a closer look at the differences between the two.
Repayments
With federal student loans, you often won’t need to worry about making payments until after you graduate, leave school, or drop below half-time enrollment. Conversely, many private student loan lenders require you to make full payments while you’re still in school. Some may allow you to defer payments or will only charge you interest, but it depends on the lender.
Interest Rates
Federal student loans come with low fixed rates that apply to all borrowers and won’t adjust over time. Private lenders may offer fixed or variable interest rates, which will vary depending on your creditworthiness.
Credit Requirements
Private student loans are granted based on a borrower’s creditworthiness, which can make it hard for college students without much credit to get approved without a co-signer. Most federal loans don’t require a credit check or co-signer, with the exception of PLUS loans.
Postponement Options
If, at some point down the road, you have trouble making your payments, federal loans come with options to temporarily postpone or lower your payments. These options may not be offered by private lenders.
Repayment Plans
Federal loans also come with the benefit of very flexible repayment plans, including one that enables you to base your payment amount on your monthly income. Private student loans are usually not as flexible, so you should review the repayment plan options carefully.
Prepayment Penalties
Federal loans don’t charge you a prepayment penalty if you pay off your loan early, while private lenders might.
Loan Forgiveness
Private lenders don’t typically offer loan forgiveness programs. However, federal student loans can be forgiven under certain circumstances, such as if you end up working in public service. Overall, federal loans are easier to qualify for, they are low cost, and they come with many helpful protections that private lenders just don’t offer in most cases. If you need financial help for college, start with the FAFSA to see what financial aid you qualify for from the federal government. Once you’ve received your school aid offer, run the numbers to see if you’ll need any additional funds. If so, then it can be helpful to look into the best private student loans available to you to help cover any remaining educational costs.
