The Pros and Cons of Taking Private Students Loans
As a new student, you have a couple of financial aids to finance your college education in the US. From scholarships, federal student loans to grants, you can get full or partial funding. However, the reality is that, aside from a fully-funded scholarship, federal student loans are often not enough to fund a college education. For this reason, private student online loans often come in to cover the outstanding fees.
While private students loans appear to be an exciting offer, it is not always without its drawbacks. Thus, it’s advised to give the offer a thoughtful consideration before signing the dotted lines. To learn about the pros and cons of private student loans online, here is a detailed read for you!
Private student loans: Pros
Many students choose to sign up for private students loans due to the following benefits:
- Closes financial gap
Arguably, this is the most common reason for taking private student online loans. Given that federal student loans are capped annually, and on aggregate, the possible amount that you can borrow as a federal student loan is limited. For instance, as a first-year undergraduate who is dependent, you cannot borrow more than $5,500 federal student loans per session. When you go for subsidized loans, it is capped at $3,500. Therefore, in a case where the cost of tuition exceeds the qualified amount for federal students loan, the implication is he or she needs to complete the funding. In this case, many students resort to taking private loans online.
- A more flexible loan option
According to financial experts, private student loans are usually more flexible compared to federal student loans in terms of the requesting process. To start with, borrowers don’t need to complete the FAFSA form. As long as the students can meet the credit history, income, and other requirements, they are secure private loans instantly. Besides, unlike federal student loans that only offer fixed interest rates, private lending institutions offer variable interest rates and fixed interest rates. With the variable interest rates, borrowers may get to save money on interest upfront. However, the rate may increase in the future.
- A lower interest rate
Sometimes, private students online loan interest rates are lower compared to the federal students loan. This usually happens when the borrower or co-signer has an incredible credit score, credit history, or higher steady income. That aside, some well-established private lending institutions offer as low as 4% for every borrower, which is significantly lesser than the interest rates often associated with federal students loan.
Private student loan: Cons
As with most loans, private student online loans are not without their downsides and risks. These disadvantages are as follow:
- Demands good credit
Individuals with bad credit records may find it quite challenging to secure private students loans. Even when they do, it is usually with a higher interest rate than normal. Given that young students usually have restricted credit history and non-steady income, many of them often have to end up with higher interest rates. Hence, private students loans online may not be the best option for students who do not have a co-signer with good credit history.
- A variable rate doesn’t necessarily save money
While choosing a variable rate for private student loans appears as a wise decision, it’s not always the case. In some cases, the rate may increase in the long run. Currently, the rates are rising, and it is expected to continue for some years to come. Thus, if you are focusing on using a low variable interest rate, you might want to reconsider by thinking about the long-term effect.
- Less forgiving options and repayment plan
The government has made several provisions for students who cannot repay their loans monthly to get through the financial challenge. For instance, an income-driven repayment plan is available for federal student loan borrowers. With this plan, they can adjust their payment to ten or twenty percent of their income, depending on the particular program applied for. Also, federal student loan borrowers who work in public service may be entitled to federal student loan forgiveness programs to wipe away their debts. Contrarily, private students loan borrowers do not enjoy similar student loan repayment assistance. In this case, the lender decides the alternative repayment plan for a struggling borrower. If the students fail to come up with the payment, it can forfeit their credit history quickly compared to students who take the federal loans.
Apparently, private students loans online are as enticing as they could be disappointing. Everything centers on the ability of the students loan borrower to refund the payment. If you have streams of income that are stable enough, you won’t have to contend with the less forgiving repayment plans or bad credit history. Also, you’ll be less concerned about whether the variable rate will rise in the future. In fact, you are likely to go for a fixed rate and complete the repayment as soon as possible. However, if you remain unsure of how to refund a private students loan online, you are best advised to take your time and think on the most comfortable loan plan for yourself in the short and long term.