Home > Student Loans > Everything You Need to Know About Private Student Loans

Comments 0 Comments

Americans currently owe more than $150 billion on private student loans, according to the Consumer Financial Protection Bureau. Unfortunately, many private loan borrowers don’t understand the difference between private and federal loans. And that can run them into serious trouble down the road.

So before you sign up for any private student loans, make sure you know everything you should about this option.

They’re Not the Same as Federal Student Loans

Private loans can vary widely from lender to lender, and are very different from federal loans, which are more uniform. Here are the major differences between private and federal student loans:

  • Federal student loans don’t have to be repaid as long as you’re in school at least half-time. Private loans, on the other hand, may require payment immediately, though this depends on the lender. Always read the fine print, and always make sure you understand the terms.
  • Federal student loans have a fixed interest rate. Private loans can have a variable interest rate, and can be quite high.
  • Federal student loans don’t require a credit check (except for PLUS loans). Private loans often require established credit, which means you may need a co-signer.
  • Interest on some federal loans is tax deductible, whereas interest on private loans may not be tax deductible.
  • Federal loans can be consolidated through a Direct Consolidation Loan, but private student loans don’t qualify.
  • Federal student loans offer many payment options, including forbearance and deferment, but private loans may not.
  • Federal student loans can sometimes be forgiven through loan forgiveness programs. Private student loans are rarely, if ever, forgiven.

They Should Usually Be Your Second Choice

The vast majority of students will get a better deal if they opt for federal student loans first, only using private loans to fill in the gaps. So before you apply for any private loans, fill out the Free Application for Federal Student Aid (FAFSA). See what you’re offered as far as federal student loans — and other, non-loan aid, especially — goes. And then decide if private loans are a good option for you.

But They Can Be Helpful

Even though private student loans shouldn’t be your first choice, they can still be a decent fill-in in some situations. This is especially the case if you wind up choosing between a Parent PLUS loan and a private loan. Parent PLUS loans have a relatively low interest rate, but they also make the parent responsible for paying the loan. Private loans, on the other hand, can be taken out in a student’s name, so the student has full responsibility for repaying them. (Caveat: If the lender requires a co-signer for the private student loan, and the student borrower defaults, the co-signer will also be held liable for those loans).

You Can–and Should–Shop Around

With federal student loans, you don’t get many choices. The government tells you how much you can take out, sets the terms of different types of loans annually, and you can take it or leave it. They’ll even choose which bank or lender services your federal student loans.

This is not the case with private student loans. You can shop with as many lenders as you like, and you definitely should shop with at least a few. This way, you can get the best terms and rates for your particular needs.

As you’re shopping around, don’t just look at rates — though they’re important. Look at other terms that could be helpful now or down the road. For instance, if you can make interest-only payments during school, you won’t have to worry about tackling those larger student loan payments right away. And see if a loan offers flexible payment options after college. Some do.

Once you’ve compared loans and chosen the one you want to go with, take out as little money as possible. You don’t want to overdo it. And of course, be sure to read and understand all the loan’s terms before you sign up.

Know Your Payments

With federal student loans, it’s important to understand what you’ll eventually be paying down the road. But this is even more important with private student loans.

Here’s why:

With a federal loan, you may plan on paying, say, $150 monthly once you graduate from college, on a standard repayment plan. Maybe you take out the loan knowing that you should be able to afford that payment on your prospective post-graduation job.

But then you can’t find a job, or end up in a lower-paying job. With a federal loan, you can most likely switch to an income-based repayment plan or an extended plan that will lower your payments.

If you wind up in the same situation with a private loan, you could still be on the hook for that $150 a month — even if you’re unemployed. So be doubly sure you can make the minimum payments on a private student loan, even if life doesn’t go as planned.

Finally, are you looking into a private student loan to cover, say, a $10,000 gap in funding for school? In this case, you might be better off shopping around for a more affordable school.

As you apply for, and obtain, student loans, it’s also good to keep track of your credit standing along the way.  Periodically check your credit reports to make sure your loans – and other credit accounts – are being accurately reported, and that there are no mistakes that are hurting your credit.  You can also monitor your credit scores as a way to get a quick overview of your credit health – if your score drops unexpectedly, it’s a good idea to check your credit reports for any problems.  You can check your credit reports for free once a year, and you can monitor your credit scores for free on Credit.com.

More on Student Loans:

Image: zimmytws

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team