Private student loans are educational loans made by any lender that is not the government. Just like federal loans, they can be used for school-related expenses such as tuition, textbooks, and housing. Although, in rare cases private student loans can offer a better interest rate than those available through the federal government, in most cases the interest rates and loan repayment terms available through federal loans are better for borrowers. Here are some considerations to think about when deciding to turn to private student loans.

​Scholarships and Grants

All loans, whether federal or private, need to be repaid. For this reason alone, students should not turn to private student loans if they have not yet exhausted all available avenues for scholarships and grants. Unlike loans, scholarships and grants never need to be repaid; they are free money for the student. Schools offer scholarships to some students based upon academic merit or financial need, but they aren’t the only source of scholarships. Many non-profits and trade organizations offer scholarships based upon volunteer experience, choice of major, ethnicity, geographic origin, and many other factors. Before turning to private loans, students should contact their financial aid office for sources of scholarships they might qualify for, as well as use one of many free online scholarship search tools.

​Federal Loans

Federal loans have many advantages over private loans, and in most cases a borrower should extinguish all available federal loans for any given academic year before relying on private loans. Most students classified as “independent” and many classified as “dependent” will qualify for federal loan funds. Here are just a few of the guaranteed benefits of federal loans: low, fixed interest rates; in-school and hardship deferment opportunities; loan forgiveness options; income-driven repayment plans; no prepayment penalties; and no minimum credit score requirement.

​Work-Study

If scholarships, grants, and federal loans have all been used up and the student still has additional financial need, the Federal Work-Study Program provides another good alternative to using private student loans. Work-study is offered as part of a student’s financial aid package and provides paid, on-campus jobs to help them cover unmet educational expenses, including living expenses, while enrolled. To take advantage of this program, the student’s school must participate in the Federal Work-Study Program. One great aspect about this program is that it will try to pair the student with a job related to their course of study whenever possible. So, for instance, someone studying library science might be able to earn a paycheck while working at the circulation desk or in the research department of the campus library. A biology major might snag a work-study job helping one of their professors in the lab, or a dance major might be able to work as a teaching assistant in the dance studio. The amount a student earns depends upon many different factors, including when they apply and their level of financial need, as well as the job they do. But in every case, students will earn no less than the federal minimum wage.

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​Cutting Expenses

There is one final option that all students should consider before turning to private student loans, and that is whether cutting down on their expenses could save them the money they would otherwise borrow. For some students, living frugally already, there isn’t much in the way of expenses that aren't a necessity. However, many students live a bit more extravagantly than they need to, and this can be the difference between taking out additional loans or living within the budget they already have. Most students share living space, either in a school dormitory or in off-campus apartments and shared houses. Any student who is considering taking out a private student loan in order to fund their own apartment should strongly reconsider the pros and cons. Likewise, eating habits are another major source of living expenses, and sticking to a sensible grocery budget that eliminates eating out can save hundreds of dollars a month – or a couple of thousand over the course of an academic year. These differences in living costs can be the difference between having to take out a private loan or sticking with available sources of financial aid.

The decision to turn to private student loans is going to be slightly different for each student, because each student has slightly different circumstances. But by taking each of these considerations into account before making this decision, they can at least know that they’ve exhausted all other options that are less expensive in the long-term. To be sure that all other options available to their unique circumstances have been considered, they should talk to their school’s financial aid office before applying to private lenders.

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