As the school year concludes, students are embarking on more than the fun and sun of summer. Many are looking ahead to the fall and for ways to secure student loans for the beginning of the next academic year.
As you look to cover your financial bases, begin by applying for as much free aid as possible, including federal grants and scholarships. Next, consider taking out student loans, specifically federal student loans, to help cover the costs of tuition and other school-related expenses. Additionally, you may need to explore private student loans to help bridge the gap between your federal aid and higher education costs.
As you explore your private student loan options, it can be helpful to consider the perspective of experts to help determine if these loans make sense for you. Start by exploring your private student loan options here to see how much you can borrow.
Private student loan vs. federal student loans
A private student loan is financed by private institutions such as banks, credit unions or state-affiliate organizations. They are not associated with federal student loans, and consequently, they don't offer the same benefits as federal student loans, namely flexible repayment terms, borrower protections and the potential for student loan forgiveness.
Federal student loans typically carry fixed interest rates, while private student loans can come with variable or fixed rates. Interest rates for the various federal student loans vary but range between 4.99% and 7.54% for the period ending July 1, 2023. Qualification is based on need and other factors other than your credit. Conversely, you need a minimum level of credit to qualify for private student loans, which come with a wide range of student loan rates as low as 4.4% for those with good credit.
It's best to exhaust your federal student loan options before turning to private student loans. As noted by Cindy Chanin, founder and director at Rainbow EDU Consulting & Tutoring, "another big difference is that private loans, just like a mortgage or a car loan, don't have borrower protections that federal loans do. These include loan forgiveness for public service and deferment or forbearance during times of hardship."
Explore your private student loan options here now to see if they make sense for you.
When are private student loans worth it?
"Private student loans are an important resource to help students and families bridge the gap between the cost of going to college and other funding received from grants, scholarships, and low-interest federally subsidized loans," says Wendy H. McAlister, president and CEO of College Foundation, Inc., which helps students with career and education planning, including applying and paying for college.
Keep in mind, you'll need some credit history to qualify for a private student loan. "If you're young, you likely don't have sufficient credit established or income to qualify for the loan on your own," says Leslie H. Tayne, founder and head attorney focusing on consumer and business debt matters at Tayne Law Group. "That means you'll need a cosigner to help you secure the loan."
When are private student loans not worth it?
While private student loans are an excellent financial option to help you cover your school-related expenses, they shouldn't be your first choice.
"Students should never consider private student loans until they've first completed the FAFSA and reviewed the financial aid for which they are eligible," says McAlister. "At that point, they can consider taking out a private student loan but should only borrow the minimum amount necessary to cover the remainder of their costs."
As with any loan, you must pay interest on the amount you borrow, so McAlister's call to minimize borrowing is imperative. While repayment may seem to exist in the distant future, when you're likely to enjoy higher earnings post-graduation, it's still wise to prepare for the future. As such, compare rates and terms from multiple lenders to help ensure your loan's affordability over time. Use the below table to easily compare multiple lenders in one location.
When is it worth combining private and federal student loans?
According to Chanin, "Sometimes combining or consolidating loans can make sense. For example, it can be hard to stay on top of multiple loans with multiple servicers. To streamline the process, it may be worthwhile to combine them into a single loan and make one monthly payment."
Remember, you can't refinance federal student loans through the government, only with a private lender. Doing so should be done cautiously, as you'll lose federal protections and benefits, including income-driven repayment plans and student loan forgiveness in the public sector. But in certain situations, it may be worth considering.
"If the private loan has a high interest rate, refinancing it could yield a lower rate, potentially saving money over the life of the loan," says Chanin. "If the monthly payments are too big to handle, combining loans and extending the life of the loan can lower those monthly payments, although you'll be paying more in interest over time. The downside is that with refinancing, you may lose certain borrower protections offered by federal loans, so be sure, as always, to read the fine print."
Check your student loan refinancing options here to learn more.
The bottom line
If you need financial assistance to pay for college expenses not covered by your federal financial aid, private student loans are a beneficial option worth considering. It's also wise to consider non-profit lenders as well.
"Students and families should determine whether their home state or the state where the college is located has a state nonprofit lender," says McAlister. "Nonprofit lenders often offer significantly lower interest rates than the for-profit private student loan companies and, in some cases, their rates are lower than the rates on Federal loans."
Comparing multiple online lenders can help you identify the best private loan option for you. No matter what type of loan you choose, take steps to avoid the type of crippling student loan debt that can plague you in the years ahead.
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