College students are often cautioned to avoid private student loans unless absolutely necessary, urged instead to take advantage of all other financial aid options first.
The advice is sound. Generally speaking, private student loans, which are offered by banks, credit unions, and other private lenders, dont offer the same level of borrower protections and benefits that government student loans do.
As a student, you should seek out grants and scholarships first — money for college that you wont have to repay — before taking on student loan debt. Then, if youre still going to need college loans, you should, in general, make sure youve maximized all your available federal student loans before you consider taking out a private student loan.
>> Interest Rates & Repayment Options
Federal education loans have fixed interest rates and more flexible repayment terms than private loans. The Department of Education offers income-based repayment options that keep your monthly payments at a figure you can afford, repayment extensions to give you more time to repay, and loan deferments and forbearances that can temporarily postpone your student loan payments if youre facing financial hardship.
If you go to work in the public sector, you may also be eligible for the discharge of some or all of your federal student loan debts.
With private student loans, on the other hand, your interest rate is almost always variable, and private lenders arent required to provide the kind of repayment flexibility that comes standard on federal college loans.
The current foreclosure crisis that began mushrooming, in part, because of adjustable-rate mortgages should be enough to make anyone leery of adjustable-rate loans on anything.
But its worth keeping in mind that when interest rates are low, as they are now, adjustable-rate private student loans can have a lower interest rate than their fixed-rate federal counterparts.
If you have excellent credit, or if you have a parent or co-signer with excellent credit, you may qualify for the lowest-rate private college loans, which currently carry interest rates that are as much as 3-percent to 6-percent lower than the rates on federal student and parent loans.
Interest rates are destined to rise as the economy continues to recover from the recession, so private loan rates wont always be this low, but if you or your parents are in a position to pay that private student loan off relatively quickly, you may be able to save money over a government-issued college loan.
>> Covering Your College Costs
So why take out a private student loan at all?
Private student loans are meant to “fill the gap” in college funding that may be left after you reach your federal student borrowing limits. In many cases, families find that scholarships and federal financial aid simply arent enough to cover the rising cost of college.
Without private student loans, you may not be able to pay for college or continue your studies.