Private student loans can help cover a gap in funding that some students need to fill. However, private student loans have drawbacks when compared to federal student loans.
- Credit-based decision. Private student loan eligibility and terms depend on the applicant’s credit. Without a creditworthy co-signer, many students may not be able to get approved, or may only be able to get a high interest rate.
- Risk for co-signers. Co-signers take on additional debt and risk when they add their name to a private student loan. Co-signing could affect one’s ability to qualify for other loans, and if the student isn’t able to make a payment, it could hurt the co-signer’s credit. In some cases, the co-signer will be responsible for the debt even if the student dies or is permanently disabled.
- Potentially higher interest rates. In some cases, private student loans may offer lower interest rates than federal student loans, but that’s not always the case.
- Interest rate accrual. With subsidized federal loans, the government will pay the interest while you’re in school and when the loans are in deferment. With private student loans, you’ll accrue interest during these periods.
- No guaranteed hardship options. The difference between unsubsidized loans and private loans is deeper than the accrual of interest. Unsubsidized loans come with federally mandated periods of in-school deferment, forbearance opportunities and a variety of income-driven repayment options. Some private student loan lenders offer deferment or forbearance options, but they might not be as lenient or lengthy as your options with federal student loans.
- No forgiveness programs. There are several federal student loan forgiveness and cancellation programs that aren’t available with private student loans.
- Shorter default period and little recourse. If you default on a private student loan, the entire loan balance becomes due immediately. Federal student loans default after 270 days of nonpayment, and when they do, you may have several options for getting your loans out of default.
- Private student loans can default after one missed payment. You may be able to repay the late balance and bring the account current before the lender charges it off, often around four to six months, depending on the lender. However, federal student loan programs can be much more forgiving.
