For some people, college is the best time of their life. It’s a chance to make lifelong friends, get an education and help shape the future. But it can also be a big financial burden. With tuition, books, and room and board, the cost can add up quickly, and many people have to take out student loans to get the college experience.
The Office of Federal Student Aid suggests looking for applicable federal student loans before resorting to private ones, because federal loans tend to offer benefits that you may not find with private loans — such as, fixed interest rates and potential subsidies. But, if your child doesn’t qualify for financial aid from the federal government, private loans for college can be another option.
What Are Private Student Loans?
Private loans for college, sometimes referred to as alternative student loans, are those in which a private lender offers funding. The Consumer Financial Protection Bureau (CFPB) states that there are three common types of private student loans:
- School Loans: Your school’s financial aid office may be able to offer loan programs, and they generally have fixed rates.
- State Agency Loans: Some states sponsor alternative student loans for those attending a state school.
- Bank Loans: Many commercial banks or credit unions have loan programs, but they usually require a co-signer.
According to Sallie Mae, the applicant’s credit history is one factor in whether a private loan is approved. For this reason, if you decide your child needs private student loan help, it’s a good idea to shop around and compare rates, terms and conditions from multiple lenders before signing any paperwork.
Pros of Private Student Loans
Getting private loans for college can enable your child to get an education. In addition to that, the other pros of getting private loans, according to the CFPB, are:
- If your child needs it, you can sometimes get larger amounts than you could with a federal loan.
- If you can be a co-signer and have good credit, you may be able to get lower interest rates initially (though not necessarily over the life of the loan).
Cons of Private Student Loans
While getting a private student loan can mean the difference between attending college and not, alternative student loans have some potential drawbacks you should take into consideration. The Office of Federal Student Aid lists the following disadvantages of private student loans:
- Private loans generally have a higher cost than federal loans, and payments are often required while your child is in school.
- These loans may require a co-signer, which means someone else has to promise to pay if the student can’t.
- There may be fewer repayment options for a private loan.
- The applicant’s credit score is one of the factors in determining the cost, which could mean a more expensive loan or the loan application being declined.
- Private loans can have variable rates, meaning interest could increase over the life of the loan.
- Interest on private student loans is not tax-deductible.
When deciding which student loans to apply for, it helps to think long term and consider both the positives and negatives. If you know what you are getting into ahead of time, it may help you make the right choice for both you and your child — and your financial futures.
Originally published on January 29, 2015.
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