student loans Post

Why do Some Students Borrow Private Student Loans?

Anna Klawitter August 7, 2020

Finding the best financial aid when going to college can be challenging. Income Share Agreements can be an excellent way to pay for college as they keep payments affordable since your payments are linked to your income by a percentage. Federal student loans are also a popular option because they offer fixed interest rates and, generally, no credit check.  

However, some students need to borrow private student loans to supplement their federal loans. According to a Franklin University report, master’s degrees can cost anywhere between $30,000 and $100,000. Because of this increase in price, it makes sense that private student loans are on the rise.

Using private student loans for school is a way to cover any financial aid gaps and afford to go to the school you want. Still, it’s important to take many factors into consideration so you don’t find yourself facing a mountain of student loan debt upon graduation. Do your research in order to know if borrowing private student loans could be a suitable course of action for you. For important data on private student loan trends check out LendEDU’s market report. So, what does a private student loan look like?


What are private student loans?

Unlike federal student loans, which are designated by the government, independent lenders issue private student loans. These can be traditional banks or credit unions, or student loan specific organizations like Sallie Mae.

Each organization has different eligibility requirements, interest rates, and repayment terms. So, it’s a great idea to compare different options before choosing one. Even though private student loans may not always be your best financial option, there are some situations where taking out a private student loan makes sense. Let’s look at three instances where you might consider a private student loan.


1. You’ve hit borrowing limits on other financial options

If you’ve exhausted all other options including scholarships, grants, federal financial aid, and Income Share Agreements, but still have a gap in covering your costs, then you may need to consider private graduate student loans. Federal loans come with a borrowing cap that limits the amount of money students can receive. That cap currently sits at $31,000 for undergraduate students who are dependents. That $31,000 is the total amount of federal loans a student can take out for undergraduate studies.

Meanwhile, the average cost of tuition at a public, four-year, in-state college is $10,230 annually. Over four years, that's $40,920, more than the current federal loan limit. If you think that’s expensive, it’s only a fraction of the tuition cost at public out-of-state colleges and private universities. Students who attend pricier schools are even more likely to need private loans when their federal borrowing options run out.

This creates a financial aid gap that may require additional borrowing to pay for the cost of college. Borrowing a private student loan can help fill that gap.


2. You’re ineligible for federal student loans

Federal Student Aid sets specific requirements students must meet in order to be eligible. Although many college students can meet financial aid eligibility guidelines, not all will. For example, students who are not U.S. citizens, permanent residents, or eligible non-citizens are ineligible for all federal student aid, including federal student loans.

Students can also lose financial aid eligibility. If your grades are less than 2.0 and if you’re enrolled less than half the time, you may not be eligible for federal student aid. 

Other reasons a student might not qualify for federal student loans include failing to register with Selective Service before reaching age 26.

That said, if a student loses eligibility for federal student loans, even on a temporary basis, many students turn to private student loans as one option to cover their costs.  With college costs going nowhere but up, many students need to borrow money to make repayments.


3. Your private loan rates are lower than what they would be for federal loans

Federal student loans are not based on your credit history. Everyone pays the same interest rate regardless of their credit score. This does help borrowers with low credit scores. However, a good credit score or a cosigner could help you secure a lower interest rate with private student loans which will save you money over time. Private student loans are unlikely to offer a lower fixed rate than a Federal loan, but, if the borrower or cosigner has excellent credit, the interest rate on a private student loan may be lower than the federal interest rate.


How to know if you’re eligible for private student loans

While the government considers your level of financial need when it comes to issuing financial aid, private lenders have different requirements. Factors that are taken into consideration can include your income, credit score, if you have a cosigner, and debt-to-income ratio. Eligibility will vary by lender, but having a low credit score or no credit history will likely make it difficult for you to qualify. Having a cosigner can help if their credit score and income meets the eligibility requirements.

Overall, the decision to take out private student loans is one you should consider carefully. If you’ve already exhausted federal student loan and Income Share Agreement options but still need funds for school, a private student loan may be a good option for finishing school.  

Carefully work through your options before taking out private student loans. If you’re interested in learning more about great financial aid, options for schools, or programs check out our student's page!

Topics: student loans


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