When you go to college, you have the option of using government-issued student loans or privately issued student loans.
There are some differences between the two, but one major difference lies in their requirements.
While both options have restrictions on how much money you can borrow, and interest rates and repayment terms, privately issued student loans have even more regulations than their government-issued counterparts, which can mean less hassle when repaying your student loan and getting access to extra cash when you need it most.
What is One Benefit of Privately Issued Student Loans
What is the benefit of student loans?
Before you graduate from college, it’s smart to think about what type of student loan will be best for you.
While federal loans may have more favorable terms in certain situations, private loans may offer lower interest rates or even more flexible repayment options.
And unlike federal loans, private ones don’t require a credit check before approval—which can come in handy if your credit isn’t so great.
When you take out a loan with your bank or a third-party lender like SoFi or Earnest, they’ll want to know exactly what they’re getting into.
What are privately issued student loans?
Private student loans are issued by private lenders (banks and credit unions) rather than directly by a school.
A common misconception is that private loans aren’t eligible for federal repayment options, but they can be discharged in bankruptcy just like federal loans.
The main benefit of a private loan is that it doesn’t have to be paid back until you graduate or drop below half-time enrollment.
You also have more flexibility with payment amounts and terms than you do with a federal loan.
If you default on your federal loan, payments go toward interest first—on your private loan, though, delinquent payments go straight to your principal balance so that you pay down what you owe more quickly.
What are the characteristics of private student loans?
Unlike federal student loans, private student loans are not guaranteed or subsidized by government entities.
Private student loans also have fewer restrictions than federal loans—for example, you can typically make payments in any amount or on a schedule that fits your needs.
They’re unsecured, meaning they don’t come with collateral like federal student loans do. And they often offer variable interest rates and repayment terms based on income—both features that are generally unavailable through federal programs.
In addition to offering more flexibility than federal loans, private student loans may be better suited for students who want to go into fields that aren’t traditionally associated with careers in public service.
Since these jobs aren’t eligible for public-service loan forgiveness (PSLF), some students turn to private lenders to help finance their education.
What are the benefits of private student loans?
Private student loans lack many of the restrictions placed on federal loans. For example, interest rates and fees for private loans are typically higher than for federal loans.
The benefits listed below are just a few ways in which private student loans are more flexible than federal loans.
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Interest Rates
One benefit of privately issued student loans is that borrowers have a lot more flexibility.
Private lenders offer a variety of repayment options, including income-based payments and fixed-rate plans with forgiveness after 10 or 20 years.
Most importantly, private student loans don’t come with some of the stipulations that come with federal loans, such as forbearance, deferment, and consolidation.
Having fewer restrictions means paying less interest over time. Since there are fewer hurdles to jump through in terms of choosing a repayment plan or trying to fix your financial situation (such as losing your job), interest accrues at a much slower rate.
Consider it a perk for going out on your own when you look at all its benefits. If anything, consider it to be an investment in your future.
Private student loans can save you money now and in the future—the key to building wealth!
Flexibility
Because privately issued student loans are underwritten (and offered) by a business, you’ll have more options when it comes to repayment.
Most federal loans include many restrictions, including no deferment or forbearance for struggling borrowers; strict payment timelines that can cause late fees and interest charges (after exceeding six months); defaulting on, which can damage your credit score and even cost you jobs in certain fields.
Private student loans typically allow greater flexibility with repayment plans—including an option that allows you to pay back interest while you’re still enrolled in school, as well as forbearance if needed.
If you require help paying off your private student loan, look into income-driven repayment plans like Pay As You Earn (PAYE).
These programs base monthly payments on how much money you make and help ensure that you don’t fall behind.
Most students should be wary of taking out any kind of private loan because they carry high-interest rates.
But if you require extra money to cover tuition, room and board, or other expenses, they might be worth considering over federal loans.
Just remember: you will eventually have to repay them! Be sure to read all the terms carefully before signing anything.
If possible, talk with a financial aid advisor at your college about different financing options before deciding what’s best for you.
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Payment Flexibility
This can be one of the biggest benefits. Once you get a few months behind, you’re subject to wage garnishment and other restrictions that may not make it possible for you to keep up with your monthly payments.
With private loans, many creditors allow you to enter into an Income-Based Repayment (IBR) or Pay As You Earn (PAYE) plan once you begin having trouble keeping up with your payments.
With these plans, your interest will be deferred for at least three years and any remaining balance will become completely dischargeable in just 20 years.
Moreover, if you go into forbearance or deferment under federal loans, interest will still accrue on your debt. That doesn’t happen with most private lenders.
They typically won’t charge you anything while your account is in forbearance, which means that when you come out of it, your total loan amount won’t have increased as much as it would have had you been paying during that time.
So, by waiting out a difficult period on income-based repayment plans instead of defaulting on your federal loans, you could save yourself thousands down the road.
And because private lenders don’t offer forgiveness programs like public service loan forgiveness (PSLF), putting off payment difficulties until later can also help reduce your total loan burden.
The average PSLF borrower saves $4,300 thanks to those forgiven payments each year; they wouldn’t have qualified for forgiveness otherwise.
The cons of privately issued student loans
There are very few limitations on what you can do with privately issued student loans, but that’s also a con.
Since there aren’t any government regulations on these types of loans, private lenders tend to get creative with their repayment conditions.
Creditor Choice
You choose your creditors. When you have federally backed student loans, such as those issued by a bank or credit union, you’re basically stuck with that lender for life.
If anything goes wrong, like if you miss a payment or don’t pay off your loan in full within 10 years of graduation, then that lender will automatically assume legal ownership of your debt and may demand reimbursement from you on its terms.
With privately issued student loans, however, you can essentially shop around to find a creditor willing to give you lower interest rates and better repayment options.
This gives you more control over your financial future after graduation.
Credit Bureaus Will Report Your Payments
When you take out a loan with Sallie Mae, there are no restrictions on how you use that money. You can pay for tuition, books, or any other qualifying educational expense.
If you’re taking out a loan to fund your education or help pay off existing student loans, it’s important to know that private lenders report your loan activity to all three major credit bureaus (Equifax, Experian, and TransUnion).
This can help boost your credit score—and it could come in handy if you want to take out a mortgage or car loan later on.
According to FICO, having 10% or more of your total credit limits tied up in student loans could be worth 100 points on your score!
There is no loan forgiveness option.
Unlike federal loans, privately issued student loans don’t come with a loan forgiveness option.
What’s more, these private loans typically have much higher interest rates than their federal counterparts—so it’s significant to pay your loans back on time.
To do so, you might consider getting a part-time job during your studies and keeping an eye out for scholarships and grants that can help you defray costs.
On average, it takes about 23 years to repay a $40,000 student loan at 4% interest; however, for those who can manage higher payments by working more or taking on additional jobs after graduation, that number drops dramatically.
You could also consider consolidating multiple smaller private loans into one larger loan with a lower interest rate. As always, make sure you understand all of your repayment options before signing any contracts.
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What Is One Benefit of Privately Issued Student Loans?
In general, privately issued student loans tend to offer fewer restrictions than federal ones—especially when it comes to co-signing options.
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