6 reasons to choose a private rather than a federal student loan
Generally speaking, students will want to maximize all federal loan options before moving on to private loans.
Federal student loans are backed by the federal government, which often means they have lower interest rates. They aren’t credit-based either, so your credit score and ability to find a co-signer won’t matter, and they offer income-based repayment plans and other useful payment options down the line.
Yet despite these advantages, federal student loans are not for everyone. In some cases, a private student loan might actually be a better fit – both for your wallet and your goals as a student. Here are some reasons why you might choose a private loan over a federal loan:
1. You need a bigger loan
If you are in the first year undergraduate student, you can only borrow a total of $ 5,500 per year in federal loans. While second-, third-, and fourth-year students can borrow a little more, it’s often not enough to cover all tuition costs.
With private lenders, loan amounts are much larger and less limited. Many companies offer loans of up to the hundreds of thousands, depending on the total cost of attending your school. Credible can help you compare rates from up to eight lenders at once.
2. You have great credit (or have a co-signer who does)
In most cases, federal student loans have lower interest rate than the private ones. The only exception to this rule? They would be high credit borrowers.
If you or your co-signer has a particularly high credit rating or a strong credit history, this could mean qualifying for rates well below current federal interest rates. In July 2020, they stood at 2.75% for undergraduates, 4.30% for graduate and professional borrowers, and 5.30% for parents.
Visit Credible at see which lenders may be willing to provide you with an affordable loan even with your current credit report.
3. You have no documented financial need
In order to qualify for federal student loans, (direct assisted loans), you must prove that you need the assistance, financially speaking. This means that if you earn more than a certain amount or your tuition fees are low enough, you may very well not be eligible for a subsidized student loan or a federal scholarship.
When this is the case, unsubsidized federal loans or private student loans may be an option. Unsubsidized loans do not require financial need and the amount varies depending on your year of study. Unlike soft loans, they earn interest while you’re in school, so there are additional costs.
You also won’t need to demonstrate financial need with private student loans. Instead, you will just need to show your ability to repay the loan. This means that you will need a decent credit score and a solid payment history on your credit report. If your co-signer has these things, that should qualify you as well.
See what kind of student loan rates you are currently eligible for.
4. You want a variable rate loan
Federal student loans always have a fixed rate. While this certainly ensures consistency and helps with budgeting efforts, it can also mean bigger expenses over time.
With private lenders, variable rate loans are often available (see this price list for exemple).
Variable rate loans allow you to take advantage of market changes and potentially lower your long-term interest costs. Keep in mind that this could also mean paying a higher rate. It all depends on where the market is going.
5. You need fast financing
Federal student aid comes with a long and interminable process. You should complete your FAFSA form and wait for the government to receive it, assess it, and send its findings to your school. This is by no means a quick or easy feat.
Private student loans generally have much faster processing and funding times. You can usually apply, get approved, and receive your funds in just a few weeks (vs. months for federal loans).
6. You are ready to set up automatic payment or go to work
Many private lenders offer discounts to borrowers who set up automatic payments or who regularly score high. These often equate to lower interest rates and, therefore, a cheaper loan over time.
Plus, if you’re willing to shop around for your loan, apply to multiple lenders, and negotiate your deals, you can also get a lower rate. In the world of private lending, companies compete for your business – and many will make concessions to secure it.
A private student loan might be right for you
Private student loans aren’t always the right solution, but for some students, they can be a smart way to save money or get funding for their studies fast.
If you are considering a private student loan for your studies, be sure to use a tool like Credible to shop around for prices and be careful not to borrow more than you need.
Use a student loan calculator to determine how much you need to withdraw before you apply.