Paying for college is one of the largest investments people will make in their lifetime. Depending on the type of degree, you can spend the next decade or longer paying it off. It almost seems as if the cost of a college education goes up every single year. With that rising price comes more difficulty and people who cannot afford their student loans.
Despite the massive expense, there are a number of ways that the poorest Americans can get assistance. There scholarships, grants, and financial aid, as well as federal student loans. But it’s not just tuition that’s expensive. Books and other needs are becoming more expensive as well. You never have to expect to pay hundreds of dollars for a single textbook, yet that’s what they cost.
There are other things as well, like housing, food, and transportation. Short of working a full-time job as well as taking a full load of classes, it can be an expensive time. To bridge the gap, a lot of people take out private loans. These are loans that are there when you need them, but can have significant drawbacks if you’re not careful.
Private vs. Federal Student Loans
There are two different types of loans you can get to help pay for college. The first is a federal loan. These are loans that are issued through the United States Department of Education. These types of loans are the most popular as they have some backing by the federal government. To receive a federal loan, you have to fill out a FAFSA application every year.
Private loans are offered through banks and other individual private financial institutions. The difference between the two can be how they’re issued. For example, to get a federal student loan you don’t need to have a top credit score. Interest rates and fees are all set by the government and can change from year-to-year. Private loans are different.
“Private loans are simply loans from private lenders — such as banks — that can be used to pay educational expenses,” says Ryan W. McMaken, communications director and economist for the Mises Institute.
And because private student loans require a good credit score, most young people would need to get a cosigner. There are different requirements for each institution, the private student loans do not get automatically issued like federal loans. If you don’t get a cosigner, you most likely won’t get a private loan.
The Pros and Cons of a Private Student Loan
Let’s start with the advantages. You may need to pull out a private student loan if you hit the cap for federal student loans. There’s only so much you can take out each year in a federal loan. So, if you need more money, you have the option to get a private loan to fill in the costs. Interest rates are also typically lower as well.
“Many (students) take out private student loans when they will still struggle to pay their tuition even after federal student loans,” says Leslie Tayne, debt resolution attorney, best-selling author and founder of Tayne Law Group.
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There are several cons with private student loans. Because good credit is required, that means someone will most likely have to cosign for you. That can put the person in risk, especially if you have a lot of debt to pay off. If you default or can’t pay back your student loans, it’s going to hurt the person who helped you.
Even if you can swing a loan without help, unless you have a perfect credit score, you will be slammed with high interest. It’s hard to get qualified through without stable income and decent credit history. That means your interest rate will likely be in the double digits and higher than federal borrowers.
Also, unlike federal borrowers, there are no forgiveness or repayment plans to help out. Your private loan is not protected by the government.
