he cost of college has risen rapidly, with the average college tuition around $10,230 for public universities and $35,830 for private universities. There are limits to how much students can borrow in federal student loans, and an undergraduate student can borrow up to $12,500 annually. The tuition fees are expensive, but borrowing opportunities are limited, causing the funding gap to pay the remaining college expenses. That's when private student loans come into play.
What Are Private Student Loans?
Private Student Loans are the student loans offered by non-federal institutions such as banks, credit unions, or online lenders. Usually, private student loans are the best option to fund your college tuition after you have exhausted all your sources of college funding. The lender sets the terms and conditions, which vary accordingly. But, they usually need a good credit history and a stable income source to get a private student loan.
Pros Of Private Student Loans
- Higher Borrowing Limits
Private student loans have higher borrowing limits as compared to federal loans. The Department of Education has limits and caps the loan amount. Since the loan amounts are capped, sometimes the federal student loan is not enough to fund the college fees and expenses. Some lenders offering private student loans also allow you to borrow up to 100% of the tuition fee.
- It might be cheaper than federal loans.
People have a misconception that private student loans are costly. This is why people opt for federal student loans considering it is the cheapest option. But, private student loans can be more affordable than federal student loans. It depends on your credit history and income sources. If you or your co-signer has good credit and a stable income source, you can often borrow at cheaper rates than the federal student loan.
- A Great Alternative To Federal Loans
Federal student loans are an excellent option for financing student loans, but not everyone is eligible for them. Sometimes, you might lose the loan after falling behind on your academic progress requirements or defaulting on your federal student loans.
Private student loans are a good alternative if you cannot get federal student loans. The private loans do not require your academic progress or full-time enrollment. If you have a good credit score and a good source of income, you can easily qualify for a private student loan.
- Variety Of Lender Options.
Several lenders provide private student loans. Since there is competition between the lenders, they can provide extra benefits and competitive rates. The lenders can offer a wide range of incentives and features with the loan. This includes flexible repayment, payment deferment, longer payoff time, and counseling. You have various options to choose from, and select the one that best fits your needs and requirements.
Cons Of Private Student Loans
- Variable Interest Rate
The federal student loans have fixed interest rates which means you pay the fixed interest rate regardless of the change in the market interest rate. While some private lenders offer a fixed interest rate, most offer variable interest rates. These interest rates are subject to change, increasing or decreasing the repayment amount. So if the interest rate increases, your monthly payment increases, and your loan cost increases.
- A Co-signer Is Required.
Many private lenders require a co-signer to borrow the loans. A co-signer is anyone who shares the legal responsibility to pay off the loan if the borrower defaults. Usually, the students do not have a credit history and income source, so the private lenders require the co-signer to prove income and credit history.
If you have a co-signer with a good credit history and good income source, you might get the loan at a lower interest rate. But, if your co-signer has a bad credit history, it may impact your interest rate. However, if you need a co-signer and don't have one, you won't be able to take out a private student loan.
- No Death Discharge
Usually, the loans are discharged in federal loans if the borrower dies, but it is not the case for private student loans. Even if the borrower dies in the private student loan, the loan is not discharged. Generally, your co-signer is responsible for the loan, but your spouse could be liable if you are married. Likewise, the co-signer's death may also lead to a student loan default.
Best Private Student Loan Providers
Private student loans are non-federal loans offered by banks, credit unions, or online lenders. They may require co-signers, and you can get the best loan deals based on your co-signer's credit score and income.
Private student loans come with their perks and can be less expensive than federal student loans since they consider credit score and income. It's better to apply for a private student loan if you are not eligible for federal loans.
Several lenders are offering private student loans. So, it would help if you considered going rate shopping before applying for the loan. This way, you can get the best deal amongst all the possible options.