Whether you’re attending a two-year community college or a four-year institution, tuition is expensive. College is a great experience that can expand your professional options and broaden your perspectives. However, many college students across America struggle with the costs of going to college. While there are plenty of scholarships and that help shoulder the cost of education, a “full ride” scholarship is not always easy to come by. Many students take out federal loans, even though they may not cover the full costs of attending school. In that situation, these students may be considering private student loans.
When should I take out a private loan?
With the cost of college on the rise, more and more students are funding their education with the help of student loans. If you find yourself in a situation where you need a student loan, you may be considering a private loan. Some reasons for taking out a private loan include unexpected expenses or a loss of a scholarship. Even students with scholarships may use a student loan to help pay for textbooks or a leftover portion of their tuition. Whatever the case, a private student loan should be your absolute last resort.
Know the shortcomings of private loans.
If you must take out a student loan, be sure that you can't qualify for federal aid before even considering a private loan. You might be wondering what the difference between the two types of loans are. After all, you will incur debt either way. What makes a private loan different than a federal loan?
Many federal loans are subsidized, which means the government covers the cost of interest while you are attending school at least part-time. As long as you’re enrolled as a part-time (or full-time) student, you don’t need to make federal student loan payments. The interest rates on federal loans are regulated and will remain the same throughout the duration of the loan. Federal loans are distributed on a need-basis and don’t require a credit check. If you have periods of financial hardship or unemployment, you may qualify for a deferment or an income-based repayment plan. There are also plenty of loan forgiveness plans for graduates going into certain fields, such as education or public service.
Compare these aspects to the features of a private student loan. First off, you’ll be subject to a credit check to apply for a private loan in the first place. If you aren’t approved on your own, you’ll need a cosigner. Unlike federal loans, which have interest rates below 10%, you don’t know what you’ll get with a private loan. Your interest rate will depend on your credit score and can be as high as 18%. There aren’t any subsidized private loans, so you are solely responsible for paying down your interest. Do you know how you’ll pay back your private loan after graduation? You might have to find a way before you get your diploma, as some private loans require you to pay while you’re still in school.