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What You Need to Know Before Turning to Private Student Loans

What You Need to Know Before Turning to Private Student LoansAs a student, federal student loans should be your first choice with the superior protections they offer. Unfortunately, many undergraduates are forced onto the private market when their parents can’t take out a PLUS Loan, and not all students even take full advantage of federal loan limits before turning to private loans because of a misleading market.

Before you turn to private student loans, here’s what you absolutely must know.


1. Private loans generally require a co-signer

Federal loans do not require co-signers, but private student loans usually do. This can be a serious problem, because the rates will be based on your parents’ credit ratings, and they will also be responsible for repayment.

What’s more, injury, disability or even death of the student will make the parent 100% responsible for repayment. With a federal loan, on the other hand, severe disability or death will make the loan permanently discharged. Many families have lived this horror story after their child died while attending college, leaving them with tens of thousands to pay after the funeral.

In one case, two parents struggled to pay back the private student loans after their child was murdered. While speaking to customer service, the father said, “What do you want from me? If I died, my God, would that satisfy you?” The reply from the customer service representative? “No, we would go after your wife.”


2. Private loans don’t offer the protection

Repayment and forgiveness options are never as lenient with private loans as they are with federal loans. If you graduate and don’t land a good job, private lenders will not be sympathetic.

If you can’t pay private loans, you’re left in a very tough position, as you most likely can’t discharge these loans in bankruptcy. This leaves you with very little leverage to negotiate new terms with your lender.

In contrast, if you borrow a federal student loan and have trouble making payments, you can qualify for an income-based repayment plan, or request deferment or forbearance.


3. Private loans have higher interest rates

Private student loans usually come with a higher variable interest rate that costs more over the cost of your loan, whereas federal student loans offer low fixed rates.

This more than anything can push you into debt that you can’t handle if a high-paying job doesn’t materialize. It’s also the main reason 1 in 4 student borrowers are having trouble repaying education debts and falling behind on payments.


4. Federal loans can be partially forgiven in some cases

Unlike private loans, federal loans can be partially forgiven if the student is employed in certain public service jobs. According to the Consumer Financial Protection Bureau, about 25% of workers in the U.S. are eligible for repayment plans or loan forgiveness on federal student debt.

If you’re planning to get a job as a teacher or work in a local, state or federal job, this may be reason enough to turn to federal loans first.


5. Late payments on private loans hurt more

With most federal student loans, you aren’t considered in default until you miss payments for nine months. The same can’t be said of private loans, as some lenders will declare you in default after a single missed payment.

At this point, your entire loan will come due, you’ll receive calls from collection agencies and your credit will be tanked. You have little recourse but to pay the bill, as not even bankruptcy can save you.


6. You shouldn’t take out private loans until you’ve maxed out federal loans

If you remember nothing else, don’t forget that it’s almost always in your best interest to max out federal student loans before even considering private loans. Even then, you should be very careful and understand all of the terms of the contract before you borrow.


7. Private loans CAN be a better option for some

Despite these very real dangers, private loans are the safer option for some. Families with strong finances and excellent credit can take advantage of interest rates well below the fixed federal rate that applies to everyone.

About Sean Martin

Sean Martin is a journalist with a passion for financial planning. When he’s not writing, he enjoys cooking and running on the beach.

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