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Pros and Cons of Private Student Loans

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Many students need to take out loans to pay for their education. While loans can provide access to opportunities that might otherwise be out of reach, they also come with significant financial burdens that can last for years or even decades. With so much at stake, it's essential to weigh the pros and cons of student loans before making a decision to borrow.

In this article, we'll explore the advantages and disadvantages of student loans to help you make an informed decision about financing your education. 

How are Private Student Loans Different than Federal Student Loans?

Before we look at the pros and cons of private student loans, it's essential to understand how private student loans differ from their closely related federal student loans. 

Federal student loans are fixed-rate loans offered by the government, so their interest rate does not fluctuate with the change in market interest rates. In addition, they often come with various flexible repayment options, including income-driven repayment plans, which can help borrowers manage their payments if they have financial difficulties.

On the other hand, private student loans are offered by private lenders such as banks or credit unions. These loans typically have variable interest rates and less flexible repayment options than federal loans. 

Private Student Loans- Looking at the Pros and Cons

Now that you're feeling good about private vs. federal student loans, let's discuss the pros and cons of private loans.

The Pros of Private Student Loans

  • 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 have lost federal aid eligibility.
  • 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 with 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.

The Cons of Private Student Loans

  • 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.
  • 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% of private student loans to undergraduate students and more than 75% of private student loans to graduate students made with a creditworthy cosigner.
  • Although some private student loans have cosigner release options, less than one percent of private student loan borrowers qualify for a 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 five percent of low-income students receiving private student loans, compared to eight percent of high-income students.

Using Scholarships to Replace Student Loans

Private student loans can be helpful. But they also can cost you significant interest if you cannot pay them off quickly. Ultimately, the decision to borrow should be based on several factors, including the potential benefits of a degree, the cost of borrowing, and your financial situation. 

Ideally, you'll need to take out as few loans as possible, and that's where scholarships come in. Scholarships are free money that you don't need to pay back. 

You can log into your free Cappex account to find an extensive and up-to-date list of scholarships. Save those you're interested in and come back to apply for them later. Just click the button now to get started. 

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