When it comes to financing higher education, many students and their families turn to federal student loans as a primary option. However, there are certain situations where it may make more sense to take out a private student loan instead.
For this BrokeScholar article, we’re examining the circumstances and situations when it makes more sense to take out a private student loan rather than a federal student loan. Read on for a detailed breakdown of some of the advantages of private student loans versus federal student loans.
Understanding the Differences Between Federal and Private Student Loans
Before we dive into the specific situations where a private student loan may be more advantageous than a federal student loan, it’s important to understand the differences between the two types of loans.
Federal student loans are offered by the US Department of Education and typically have lower interest rates and more flexible repayment options than private student loans. What’s more, federal student loans may offer borrowers loan forgiveness or discharge options in certain situations, such as if the borrower becomes permanently disabled or if the borrower works in a public service job for a certain amount of time.
On the other hand, private student loans are offered by banks, credit unions, and other financial institutions. Private student loans typically have higher interest rates than federal student loans and may require a co-signer to qualify. Additionally, private student loans typically have less flexible repayment options and do not offer loan forgiveness or discharge options.
Now that we have a basic understanding of the differences between federal and private student loans, let’s explore when it may make more sense to take out a private student loan.
When Private Student Loans May be More Advantageous than Federal Student Loans
While some people have a negative view of private student loans as compared to federal ones, there are actually several advantages to the former in certain circumstances. For example, you may not meet the eligibility requirements to secure a federal student loan, or you may need more money than the typical federal student loan provides. Let’s take a some of the notable advantages of a private student loan versus a federal student loan:
When You Need to Borrow More than the Federal Limits Allow
Federal student loans have borrowing limits that may not cover the full cost of attendance for some students. In such situations, it may make sense to consider a private student loan to cover the additional costs. Private student loans typically have higher borrowing limits than federal student loans, which can be helpful in situations where the cost of attendance exceeds the federal limits.
The reason private student loans can have higher borrowing amounts than federal student loans because they are offered by private lenders, such as banks or credit unions, who have different lending criteria than the federal government.
When you apply for a federal student loan, the amount you are eligible to borrow is determined by a number of factors, including your financial need, cost of attendance, and grade level. Federal student loans have limits on how much you can borrow, which vary depending on whether you are a dependent or independent student and whether you are an undergraduate or graduate student. These limits are set by the federal government and are the same for all borrowers. Many of these factors are laid out in the Free Application for Federal Student Aid (FAFSA) that prospective college students fill out and submit when applying for financial aid.
Private student loan lenders, on the other hand, have more flexibility in setting their own borrowing limits. Private lenders may consider a broader range of factors when determining how much you are eligible to borrow, including your credit score, income, and employment history. As a result, private student loan borrowers may be able to borrow more than the federal limits allow.
When You Have Excellent Credit
Private student loan lenders typically offer the lowest interest rates to borrowers with excellent credit. If you have a high credit score, it may make more sense to take out a private student loan rather than a federal student loan, as you may be able to secure a lower interest rate and potentially save money over the life of the loan.
Federal student loans do not typically take into account credit score as a factor in determining eligibility or loan terms. Federal student loans are primarily need-based, meaning they are designed to assist students and families with financial need in paying for higher education.
When you apply for a federal student loan, you will need to complete the Free Application for Federal Student Aid (FAFSA). The FAFSA collects information about your family's income, assets, and other factors that determine your financial need. Based on this information, the government will determine your eligibility for federal student aid, including federal student loans.
There are two main types of federal student loans: Subsidized and unsubsidized. Subsidized loans are need-based, meaning the government pays the interest on the loan while you are in school and during certain periods of deferment. Unsubsidized loans, on the other hand, are not need-based and accrue interest while you are in school.
When You Can Secure a Co-Signer with Excellent Credit
If you don’t have excellent credit yourself, you may still be able to qualify for a lower interest rate on a private student loan if you can secure a co-signer with excellent credit. A co-signer is someone who agrees to take on the responsibility of repaying the loan if you are unable to do so. By having a co-signer with excellent credit, you may be able to qualify for a lower interest rate than you would on a federal student loan.
When You Need Funds Quickly
Federal student loans typically take longer to process and disburse than private student loans. If you need funds quickly to cover educational expenses, a private student loan may be a better option. Private student loan lenders can often process and disburse funds in a matter of days, which can be helpful in situations where time is of the essence.
When You Want to Consolidate High-Interest Debt
If you have high-interest debt, such as credit card debt, you may be able to consolidate it into a private student loan with a lower interest rate. This can potentially save you money on interest over the life of the loan and simplify your repayment process by consolidating multiple payments into one.
The Bottom Line on Private Student Loans vs. Federal Student Loans
While federal student loans are typically the first choice for many students and families, there are certain situations where a private student loan may make more sense. Private student loans may be advantageous when you need to borrow more than the federal limits allow, have excellent credit, can secure a co-signer with excellent credit, need funds quickly, or want to consolidate high-interest debt.
However, it’s important to keep in mind that private student loans typically have higher interest rates and less flexible repayment options than federal student loans. Furthermore, private student loans do not offer loan forgiveness or discharge options. Before deciding to take out a private student loan, be sure to carefully consider all of your options and compare the terms and conditions of different loans. It may also be helpful to consult with a financial advisor or student loan expert to determine the best course of action for your individual situation.
Before you resort to taking out a student loan, be it a federal one or a private one, finding and applying to college scholarships should be your first move. If you need help getting started, BrokeScholar has a vast library of scholarships and grants that prospective and current college students can win, which can significantly help with the burden of paying for higher education. Plus, if you win a scholarship that doesn’t cover all your education costs, you can take out a smaller student loan to make up the difference.
