There are two main types of student loans: federal and private. Each works differently, and understanding those differences is key before you borrow.
Private student loans can sometimes fill funding gaps, but they often come with fewer protections and less flexibility than federal loans. That means they may create challenges after graduation if repayment becomes difficult.
In certain cases, though, a private loan may be a reasonable choice. The most important step is to carefully review the terms so you know what repayment will look like before you commit.
What Is a Private Student Loan?
Private loans for students are educational loans offered by credit unions, banks, and other lenders — any lender besides the federal government. These loans usually depend on your credit history and may require a co-signer. Interest rates, repayment terms, and borrower protections can vary widely by lender.
6 Reasons a Private Student Loan Might Be a Bad Idea
Before you take out one or more private loans, you’ll want to make sure you’re aware of their potential pitfalls. For instance:
1. You Might Have to Repay Immediately
Federal loans have a six-month “grace period” after graduation. As such, you won’t have to start repaying the loan until six months after your graduation date.
Private loans generally don’t come with this same grace period, and some lenders may even require you to make full payments (including both the loan principal and interest) while you’re still enrolled in school.
2. Interest Rates Tend to Be Higher
If you’re just starting college, you’re likely applying for “direct” loans. They’re called “direct” because the money comes directly from the U.S. Department of Education. Direct loans have fixed interest rates. This means that from the time you take out the loan to the time it’s paid off, the interest rate won’t change.
Private student loans can have fixed interest rates, but some have variable rates, and others may allow you to choose between the two. Most private student loan interest rates are higher than those for federal loans. However, you may be able to find one with a lower rate, especially if you have good credit.
#### Is Private Student Loan Interest Deductible?
Fortunately, the answer is (usually) yes. Interest on private student loans may be tax-deductible, just like federal loans, if the loan qualifies. You can deduct up to $2,500 per year, depending on how much interest you paid and your income level.
3. Private Loans Require Credit Checks
Direct federal student loans don’t require a credit check (except for PLUS loans). However, most private student loans do. To qualify for a low interest rate—and sometimes to get approved at all—you would need an established credit history. Most 18- or 19-year-old students don’t have much of a credit history at all.
Having a co-signer might increase your chances of approval. Many students ask their parents to co-sign their loans, but some parents are understandably hesitant to do so—by co-signing, they’re agreeing to pay your loan if you default on it.
4. You Can’t Qualify for a Direct Consolidation Loan
Most federal student loans can be consolidated with a direct consolidation loan. If you have multiple federal student loans and owe a considerable amount, consolidating your loans can give you a lower monthly payment, more time to pay, or both.
However, private student loans don’t qualify for direct consolidation. Refinancing private student loans may be possible, but you would need a private consolidation loan to do so.
5. You’ll Have Fewer Payment Options
Federal student loans offer numerous repayment options, including Standard Repayment, Extended Repayment, and Graduated Repayment plans. There are also income-driven repayment (IDR) plans, although these are being phased out for new borrowers.
By contrast, private student loans offer fewer options. This may not seem like a significant issue, but it’s worth considering whether you’ll be comfortable repaying your loan if your circumstances change.
For instance, imagine that you have a private loan with a fixed payment of $400 per month. You might expect to get a well-paying job after graduation, but if you can’t secure one, you won’t be able to adjust the payment amount based on income.
6. You Won’t Qualify for Loan Forgiveness
Some federal student loans come with what’s called “forgiveness.” If you make all of your payments on time for a specified period, your remaining balance may be forgiven or erased if you meet all of the program’s requirements.
For example, if you work for a nonprofit or government organization, you may qualify for Public Service Loan Forgiveness (PSLF) and get any remaining balances eliminated after just 10 years. Private student loans, on the other hand, rarely offer forgiveness.
When Might Private Student Loans Be a Viable Option?
In light of the key differences outlined here, federal student loans are almost always more advantageous for students. However, because most loans are capped (meaning there’s a maximum amount you can borrow), you might find that they aren’t enough to cover your educational expenses.
The amount you can borrow in federal student loans depends on the type of loan, your school year, and whether you’re considered dependent or independent based on FAFSA rules (not your tax filing status). Undergrads can usually borrow $5,500 to $12,500 a year, grad students up to $20,500, and PLUS Loans can cover any remaining costs after other aid for eligible students.
Is a private student loan worth it in this case? Only you can answer that question.
For instance, if you’re considering a private loan to cover a $10,000 funding gap at your chosen school, you might opt for a private loan or explore more affordable college options.
The latter option is more common than you might think. Many students now choose to go to a two-year or community college for their first couple of years, then transfer to a more prestigious school. That way, they can save on tuition and still earn a degree from their preferred school.
Is It Better to Get a Private Student Loan or Federal?
Is it bad to get a private student loan? When it comes to the question of federal vs. private student loans, many borrowers will see a greater benefit with federal loans. However, this doesn’t necessarily mean private student loans should be avoided at all costs.
As long as you understand your repayment terms and are confident you can meet them, a private student loan could help fill in the gaps that federal loans don’t cover.
