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You may need to take out private student loans. Here’s what to know before you do it.
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If you’ve maxed out federal student loans, and you still need to bridge a gap in funding, taking out a private student loan can help you get enough money for school. And in some cases, private loans may even have lower rates than federal loans. That said, private student loans have risks, can often be more costly than federal loans, and can present a borrower with newfound dilemmas. So we asked pros: First, what exactly is a private student loan, and second, if you’re thinking about taking out a private student loan, what mistakes do you want to avoid? See the lowest student loan rates you can get here.
What is a private student loan?
While a federal student loan is one funded by the government, a private student loan is made by a lender such as a credit union or bank. Federal loans only have fixed interest rates, while private loans can have either fixed or variable interest rates. Federal loans come with government protections like the opportunity to get income-driven repayment options, loan forgiveness and more (more on this later), while private loans generally do not.
What mistakes do people make when taking out private student loans?
1. You didn’t max out your federal loans first
Anna Helhoski, student loan expert at NerdWallet, says the biggest mistake a student loan borrower could make when it comes to private loans would be not maxing out federal student loans first. “Taking out federal student loans first will lower the amount you’ll need to borrow in private debt to cover any payment gaps,” says Helhoski. One reason pros say to get federal loans first? They typically have far more generous repayment options, like income-driven plans, which base payments on your income; loan forgiveness options; and forbearance and deferment, which pause payments for a period of time and more.
2. You got sucked into low variable rates, but that’s not right for you
While you may see private student loans advertised with starting rates well below those of federal loans, “many private student loans charge variable rates which is especially bad in a rising-rate environment like the one we’re in right now,” says Ted Rossman, senior industry analyst at Bankrate.
3. You didn’t check your credit score before applying
Before taking out a private student loan, many borrowers fail to check their credit history, which can significantly impact their rates. “Errors on your credit history can affect your credit score which can in turn affect your eligibility for a private student loan and the interest rate you get. If there’s a mistake, you can get it removed by disputing it, and the creditor only has 30 days to confirm the accuracy of the information or remove it,” says Mark Kantrowitz, author of Who Graduates from College? Who Doesn’t.
4. You took out too much money
“Student loans are not free money and every dollar you borrow will cost about two dollars by the time you repay the debt. You should borrow as little as you need, not as much as you can,” says Kantrowitz.
5. You didn’t shop around
It’s also important to shop around for the lowest cost loan. “The loan with the lowest advertised interest rate may not be the least expensive loan for you, since you may get a much higher interest rate,” says Kantrowitz. The only way to be certain you’ve got the best rate is to apply for several loans and compare them. “You should also consider other factors such as fees, length of repayment and options to pause payments if you run into an unexpected financial challenge like a job loss,” says Helhoski. You’ll want to be sure you only do a soft application though since a hard one can ding your credit score.
6. You chose the wrong loan term
If you can afford to shorten your loan term, you should do it. “Even if the interest rate is the same, you’ll pay more total interest over the longer repayment term, even if the monthly loan payment is lower,” says Kantrowitz.
The advice, recommendations or rankings expressed in this article are those of MarketWatch Picks, and have not been reviewed or endorsed by our commercial partners.
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