Evaluating Private Student Loans

James S January 6, 2020
Evaluating Private Student Loans

Private student loans found through banks, credit unions and other financial institutions can be great alternatives to government student loans. There are many differences between private and public loans, but it's possible to find private loans that offer comparable interest rates and flexible repayment options. Some people can't get government aid for college because either they or their parents earned too much money in previous years. In this article, we'll help you understand what to look for when evaluating private student loans.

The first difference between the private student loans and the federal/public loans are the interest rates and when that interest starts to accrue. Many private student loans start the clock while you are still in school, and my even require interest payments. For the federal program, interest rates are fixed and usually lower than private loans. Be sure to check rates and payment plans before accepting any private loans. Also, private student loans have been known to have variable interest rates, some up to 18 percent. A public loan has a fixed rate that can only be changed with Congressional approval. Depending on how the market changes, a variable interest rate could make private student loans more expensive over time. Also worth noting though is that each private loan is different.

With a federal loan, there are no credit checks. You can get a guaranteed loan, and help build a good credit record, as long as you keep up your payments. The majority of private student loans will require an established credit record. This credit record will determine the interest rate on your loan and the amount of future payments, not to mention the total amount you will be required to repay. You also won't need a cosigner to get a federal student loan in most cases, while with a private loan a cosigner will most likely be needed.

When it comes to taxes, the interest on a federal loan may be tax deductible; this is not the case with a private loan. If you are having trouble repaying your loan, you may be able to postpone your payments, or lower them with a federal loan, private loans will likely have no forbearance or deferment options. With the federal loan, no penalty for early repayment is charged, something you'll need to investigate with a private loan. In fact with the federal program, you may be eligible to have some of your loans forgiven in exchange for work in public service. This is unlikely in private loans.

Ultimately, the best private student loan or public loan is the one that will best serve your needs, costing you the least while maximizing your educational potential. Some of the best private student loans come from credit unions, which are nonprofit financial institutions that are more likely to offer benefits on par with government student loans. People may also decide to apply for private college loans if they don't receive enough public aid to pay all of their tuition. In the right circumstances, private student loans offer valuable options for students.

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