Private student loans are a means to an end when students have exhausted other forms of financial aid, including scholarships, grants, and federal student loans. Currently, private student loans make up more than $165 billion of all student debt across the United States, and while this figure is far below the total $1.45 trillion in student loans, it is trending upward.

Private student loans have some advantages when compared to federal student loans, but they also have drawbacks that borrowers should know about before applying. Here is a quick overview of the difference between private and federal student loans, and the advantages and disadvantages that come with private loans.

Private Student Loans vs. Federal Student Loans

Most students in need of financing to cover the costs of education turn to federal student loans first. Federal student loans are provided by the federal government and are need-based. Borrowers do not need to submit details related to credit history or score to qualify for federal student loans.

Additionally, federal student loans have inherent benefits that private student loans lack, like income-based repayment plans, forgiveness of loans in the future, fixed interest rates set by the government, and deferment and forbearance options for borrowers facing financial hardship.

Private student loans, on the other hand, are offered by private lenders, and that means a full review of credit history and score are needed to qualify. Borrowers using private loans for their education needs do not have the option of income-based repayment programs nor do they have an option for forgiveness after a set period.

Private student loan lenders may, however, offer more flexible and cost-effective repayment than federal student loans for well-qualified borrowers.

Advantages of Private Student Loans

There are certain advantages to private student loans that federal loans do not offer, including the following:

  • Not need-based - This means that private student loan lenders base qualification for a new loan on the credit history, score, and income of the borrower.
  • No FAFSA required - Students do not need to complete the Free Application for Federal Student Aid (FAFSA) to apply for a private student loan. Instead, an application is submitted directly to the student loan lender.
  • Cosigner availability - If a borrower's credit history is not strong enough to qualify for a private student loan on his or her own, a cosigner may be added to the application to increase the chance of approval.
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Drawbacks of Private Student Loans

While private student loans may seem more appealing than federal student loans on the surface, there are underlying caveats of which borrowers should be aware. The most important include:

  • Limited repayment options - Borrowers do not have access to income-based extended term repayment options with private student loans as they do with federal student loans. Instead, each lender dictates the maximum term length, typically no more than 20 years, and the repayment plan is set at the time of application and cannot be changed.
  • In-school payments - Some private student loan lenders require borrowers to begin repaying any borrowed funds immediately. With no deferment option for monthly payments, private student loan borrowers may find it difficult to cover what’s due, putting them at a greater risk of default early in the life of the loan.
  • Higher cost - Private student loan lenders usually provide the option of variable or fixed interest rates on new student loans. While variable interest rates are typically lower than fixed rates initially, they have the potential to increase in line with the interest rate market. When this happens, private student loan borrowers with variable interest rate loans experience an increase in their monthly payment and a higher total cost of borrowing over the life of their loans.

It is important for student loan borrowers to understand both the benefits and the drawbacks of private student loans before using them to fund their education costs.