Pros and Cons of Private Student Loans

on June 2, 2017

Before applying for a student loan, consider the pros and cons of private student loans.

 

Pros

  • Private student loans provide supplemental financing when the student has reached the Federal Stafford loan limits
     
  • Private student loans have higher loan limits than federal student loans
     
  • Private student loans can be less expensive than Federal Parent PLUS loans if the borrower (and cosigner, if any) have excellent credit
     
  • Private student loans are an option for borrowers who have failed to maintain satisfactory academic progress and who have lost eligibility for federal student aid
     
  • Some private student loans are available to borrowers who have dropped below half-time enrollment
     
  • Private student loans can be available to students whose parents are unwilling or unable to borrow but where someone else is willing to cosign the loans
     
  • Some private student loans are available to international students who have a creditworthy U.S. citizen cosigner
     
  • Private student loans are available to finance previous school charges, unlike federal student loans, which are limited to $200 in previous school charges
     
  • Some lenders offer private student loans to pay for expenses after graduation, such as bar study loans after law school and residency/relocation loans after medical or dental school
     
  • Private student loans provide a quicker application process because they do not require the student to file the Free Application for Federal Student Aid (FAFSA)
     
  • Borrowers can obtain a private student loan with a lower interest rate by applying with a creditworthy cosigner with excellent credit
     
  • Interest on private student loans may be tax deductible through the Student Loan Interest Deduction

Cons

  • Needing to borrow from a private student loan or a Federal Parent PLUS loan can be a sign of over-borrowing
     
  • Most private student loans do not offer income-driven repayment plans
     
  • Private student loans do not qualify for teacher loan forgiveness or public service loan forgiveness
     
  • Private student loans have limited options for financial relief when a borrower experiences financial difficulty
     
  • Deferments and forbearances are limited to one year in total duration on private student loans, compared with three years for federal student loans
     
  • Some private student loans offer death and disability discharges similar to federal student loans, but some do not
     
  • Most private student loans require a creditworthy cosigner, with more than 90 percent of private student loans to undergraduate students and more than 75 percent of private student loans to graduate students made with a creditworthy cosigner
     
  • Although some private student loans have cosigner release options, less than 1 percent of private student loan borrowers qualify for cosigner release
     
  • Qualified education loans, including private student loans, are almost impossible to discharge in bankruptcy
     
  • Eligibility for a private student loan and the cost of the loan depend on the borrower’s (and cosigner’s) credit scores, debt-to-income ratios, annual income and employment history
     
  • Some private student loans offer more discounts than federal student loans, but the borrower might have to make payments during the in-school and grace periods to qualify for a lower interest rate
     
  • Private student loans offer fewer repayment plans than federal student loans
     
  • Private student loans are less available to low-income students, with only 5 percent of low-income students receiving private student loans, compared with 8 percent of high-income students

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