Private student loans are offered by banks, credit unions, and other financial institutions. They may be used for tuition, room and board, books, and other educational expenses. While private student loans can be helpful, they come with some downsides and are not a good idea for everyone.
In this post, we’ll take a look at whether or not it makes sense for you to get a private student loan, and what to consider before signing on the dotted line.
Things You Can Do to Avoid Taking Out a Private Student Loan
Taking on debt to finance your college education is a serious topic and should be avoided whenever possible. Luckily, there are a number of things you can do to try and make college more affordable and cover your expenses before taking out a private student loan.
Exhaust All of Your Options for Scholarships or Grants before applying for a private student loan
Unless you have the resources to pay for college yourself if you want to minimize the amount you borrowed in student loans you need or eliminate them altogether you should take advantage of all the grant and scholarship opportunities that are available.
The first step in maximizing the grants and scholarships you receive is to complete the Free Application for Federal Student Aid (FAFSA). The results of your FAFSA application will help the financial aid office at your college determine what federal and/or state grants you may be eligible for and how much you will receive.
Colleges usually have their own institutional grants or scholarships that require students to have financial need or meet some other financial criteria in order to be eligible to receive them. If you don’t complete the FAFSA or the CSS Profile (if your school requires it), you won’t be able to be considered for these awards.
If after completing the FAFSA you aren’t found to have a large financial need don’t worry. There are a lot of merit-based scholarships you can apply for. Merit-based scholarships are awarded to students based on their academic, athletic, or other achievements, and don’t require a demonstration of financial need.
There are many places to find merit-based scholarships to apply for. Your college, your high school, community groups or organizations, and scholarship websites are all great places to start your search. All of these sources have different scholarships available, so be sure to check them all out!
Get a Part-Time Job
Getting a part-time job while attending college is a great way to help cover some of your expenses and also help you develop important job skills. Plus, depending on where you work it could also help you gain valuable experience in your field of interest.
Having a job on campus can be more convenient, and if you have been awarded college work-study after completing the FAFSA, it might be easier to find a job on campus. However, not all student positions will require you to have a work-study award.
If you struggle to find a part-time job on campus, there are plenty of students who get jobs off-campus. Some of these jobs might be within walking distance from campus, while others might be further away and require you to have access to public transportation or a car.
Look Into Tuition Assistance From Your Employer
If you are planning to work part-time off-campus while you are in college to help reduce your need for student loans one option you may want to explore is tuition assistance from your employer. Many employers offer this benefit to help their employees further their education and career.
Tuition assistance can cover all or part of your tuition and fees, and in some cases, may also cover books and other expenses. Usually, it’s limited to a specific dollar amount per year. However, some companies may offer as much as 100% tuition reimbursement.
Go to a More Affordable School
(https://educationdata.org/average-cost-of-college)
The cost of college has skyrocketed in recent years. The average cost of attendance at a four-year public university in the United States is now over $25,000 per year with the cost going up from there for non-resident students or students who are going to private institutions.
In response to these high prices, many students are looking at going to or transferring to more affordable colleges to avoid incurring too much debt. Students who are attending private colleges might consider going to a public school. Out-of-state students who are going to public schools may now look at staying home and attending in-state schools to avoid having to pay non-resident tuition rates. For students just starting their college careers, community college might be a more affordable option in terms of tuition rates.
Find a Less Expensive Housing Option
While the cost of tuition might get most of the attention, the cost of housing for college students can also be quite expensive. Finding a less expensive housing option while in college can help save a lot of money helping to lessen the need for loans.
There are many ways college students can find a less expensive housing option. Be sure to have a roommate if you live in a residence hall, and don’t get a meal plan at the dining hall that is more than you need. If you’re living in a residence hall, you should check if there are more affordable places to live off-campus. Then if you end up moving off-campus, always make sure you have at least one roommate so you can save money by sharing the cost of utilities. You can save even more money living with family and commuting from home if the distance isn’t too great.
Make Sure You Have Taken Out the Federal Loans for Which You Are Eligible
Federal student loans offer many benefits not typically available with private loans, such as fixed interest rates and income-driven repayment plans. These loans are made by the government, with terms and conditions set by law. Conversely, private student loans, with the terms and conditions set by the lender, can be lacking some of the benefits of federal student loans, and in some cases could be more expensive than federal student loans.
If you find yourself struggling to cover all your school-related expenses, be sure to speak with your financial aid advisor. They can help ensure you have taken out all the federal loans you are eligible for before considering a private student loan.
Pros and Cons of Taking Out Private Student Loans
Private student loans can be a fine option for graduate or undergraduate students who need additional help with tuition or other expenses. But private student loans may not be the best option for everyone. There are both positive and negative aspects to taking out a private student loan, so it is important to understand what you would be getting yourself into before making a decision.
Here are some of the pros and cons to help you decide if taking out a private student loan is right for you.
Pros
- Potential for Lower Private Student Loan Rates
- You Don’t Have to Maintain Federal Financial Aid Eligibility
- Fees Can Be Cheaper Than Federal Loans
- Many Have Private Loans Have Higher Borrowing Limits
Cons
- Variable Interest Rates
- Loans With Fixed Interest Rates Can Be Higher Than Those of Federal Loans
- You Need Good Credit or a Credit Worthy Cosigner to Qualify
- Fewer Repayment Options
- Most Don’t Have Access to Income-Driven Repayment or Forgiveness
- Interest Rates Can Be Based on Creditworthiness
- No Federal Interest Subsidy
When Is Getting a Private Student Loan a Good Idea
It’s possible you have done everything you can to save money, investigated ways to get the most out of scholarships and grants, and even considered ways to earn some extra money while in school, but all of that still might not be enough. However, if you’re considering taking out private or parent loans, it may be a sign that you’re borrowing more money than you can afford to repay.
So how can you tell if taking out a private student loan makes sense for your situation?
There is no one-size-fits-all answer to that question, as each person’s situation is unique. However, here are some things that you may want to consider, check off your list, or understand before taking out a private student loan.
You Can’t Borrow More Through Federal Student Loans
As we discussed earlier, before taking out a private student loan you should pay your financial aid advisor a visit and make sure that borrowing more in federal student loans is not an option. Assuming you have done that and you are not eligible for more federal student loans, you should go ahead and explore your private student loan options.
You’re Considering Getting a PLUS Loan
PLUS loans are available to graduate and professional students as well as parents of dependent undergraduate students. If you’re a graduate or professional student who needs more money for school, or your parents are considering a PLUS loan for you as an undergraduate student, you may also want to look into private loans to see if they might be better for your situation.
PLUS loans are the most expensive of the federal student loan options with interest rates of 6.28% and origination fees of 4.248% for 2021-2022. It is very possible that you could find private loans that you could qualify for that have lower interest rates, fees, or both. However, how interest is handled while you are in school along with the repayment options for PLUS loans may be much better than what you have with some private loans.
If you look at all the details of a private loan and find that its terms work for you it is very possible that it could save you money on fees and have a lower interest rate as well.
You Have Great Credit (Or a credit-worthy Cosigner)
If you’re looking to take out a private student loan, you’ll need to have strong credit or a credit-worthy cosigner. A cosigner is someone who agrees to take on the responsibility of the loan if you can’t make the payments. This means that they’ll be responsible for the entire loan balance, so it’s a big commitment.
Most private lenders will require that you have a cosigner in order to qualify for a loan. There are a few private lenders who offer student loans without the need for a co-signer. However, you’ll end up paying higher interest rates this way.
Understand the Terms Before You Apply for a Private Student Loan
Before taking out a private student loan, you should review the terms and conditions of each lender. In addition to the interest rate and fees that you will be paying, private student loans each come with their own set of rules about repayment, forbearance, and consolidation, so it is important that you read through all the fine print before signing on the dotted line.
Know What Your Student Loan Payments Will Be before taking out a private student loan
People will never get a loan for a house or a car without knowing how much their payments will be at the end of the month. Yet, some college students are willing to take out student loans without how much the payments will be. This can be a recipe for disaster.
It’s important to keep track of all the federal and private student loans you’ve taken out in the past, as well as the ones you’re taking out this year. In addition, you should project how much you will expect to need to take out in future years. Knowing this information will help you understand how much you’ll owe each month when you begin repaying your loans, as well as what types of repayment plans will work best for you.
As you are estimating what your loan payments will be in the future you will probably want to use a student loan payment calculator like the Loan Simulator on the Federal Student Aid website. If you do a web search you will find that ere are many student loan calculators available.
Know What Salary to Expect After Graduation
Before taking out a private student loan, it’s important to know what salary to expect after graduation. Knowing this information will help you determine how much you can afford to borrow, and whether you’ll be able to repay your loan in a timely manner.
To get an idea of what salary to expect after graduation, research the average starting salary for your desired career field. There are many resources available to help you with this, such as the Career Center at your college, the Bureau of Labor Statistics (BLS) website, and other websites such as www.payscale.com and www.glassdoor.com. You can also talk to recent graduates in your field of interest to get an idea of what they’re earning.
Know What It Will Cost to Live Each Month After You Graduate (Create a Budget)
Related to what salary to expect once you are working in your field, before taking out a private student loan it’s important to create a budget so you know how much it will cost to live each month after you graduate. That way you will be able to see if it will be realistic for you to pay back your student loans while living the way you envision.
To create a budget, start by looking at your current expenses and income. Then, estimate your future expenses and income. Make sure to include all of your necessary expenses, such as rent, food, transportation, utilities, and insurance. Don’t forget that expenses such as cell phone bills, internet, entertainment, and clothing as these expenses can really add up too. Finally, you should also include your debt payments, savings, and other financial goals.
If you are afraid that you will be forgetting some items you can find a budgeting worksheet online or you can ask your parents for some help.
Final Thoughts
With the cost of college on the rise, more and more students are taking out loans to help pay for their education. Federal loans may not, along with any other financial aid you are receiving, cover the full cost of your education-related expenses, and looking for ways to save money on your educational expenses may not be able to make up the difference. This is where private student loans come in to help fill the gap, but they are not a good idea for everyone.
If you understand the terms of a private loan and know what your monthly student loan payments will be, along with some other things that we covered, like your expected salary and expenses when you are done with college, you can determine whether private student loans are a good idea for you.
