There are several types of private student loans, check out our list to choose the best one for your interest:
- Parent Loans
- Medical School
- Residency Loans
- Health Professions
- Law School
- Bar Exam Loans
How can I choose the best private Loan?
Choosing the right aid is a crucial process and the decision shouldn’t be made lightly.
These are the key elements to consider when opting for private student loans:
- Flexible repayment terms
- Competitive interest rates
- Make a cosigner release available
- Private student loans can be used to refinance existing debt with better terms and conditions.
- No late fees
- Beneficial Perks
The Difference Between Federal and Private Student Loans
While on the surface there may not be a big difference between federal or private student loans, the reality is that they’re quite different when you weigh them for the long term. In addition to who is originating the loan—either the federal government or a private lender—there are some key areas where they differ. Here are some of the biggest distinctions between federal student loans and private ones:
- Deferment: Most federal loan programs let you fully defer your payments (including interest) until after you graduate, and even for a few months afterward. Private lenders may include this option, but many will require at least interest payments or a small fixed sum to reduce the total loan amount after graduation.
- Origination fees and costs: In general, federal student loans have a small (1% to 4%) origination fee, which can be costly when your loan amount is larger. This obviously varies by lender, but in most cases private student loans have no origination fees, making them more affordable in the long run.
- Interest rates: This is perhaps the biggest difference between federal and private student loans. The former offer fixed rates which are set by the government yearly and are standardized across loan programs. Private lenders also offer fixed rates, though they change based on borrowers’ credit histories and scores. Additionally, private lenders also offer variable rates, which can be lower than fixed rates in some cases.
- Forgiveness: This is also key, as it’s hard to tell when you get a loan if you’ll face financial hardship in the future. Federal loans offer various programs to help you reduce your burden and forgive your debt, while most private lenders don’t.
Private Student Loans Pros and Cons
Before making any decision, it’s worth weighing the benefits and drawbacks of private student loans. Some of the biggest advantages include:
- Private student loans give you greater flexibility when it comes to interest rates
- You can apply for a private student loan at any time, unlike federal loans which have set application deadlines
- They tend to have higher amount limits and are not necessarily restricted by cost of attendance calculations
- You have a greater range of repayment terms available, including 5, 10, and 20-year options
- A good credit history exhibited by you or your cosigner can result in significantly better interest rates than most available federal loans
- Private student loans are generally processed and approved much faster than FAFSA-based federal applications
On the other hand, there are some drawbacks to private student loans, including:
- If you’re just starting university, odds are you don’t have any credit, so you’ll have to get a cosigner or accept a much higher interest rate to start
- Many private lenders don’t include protections for financial hardship or forgiveness programs
- They also have fewer repayment options than federal income-driven repayment programs
Interest Rates for Private Student Loans
One major reason to opt for a private loan over a federal student loan is the ability to have a lower, or simply different type of interest rate.
Federal student loan interest rates are set by the federal government every year, but private loans are based on a variety of factors including your credit scores, the repayment term you prefer, and in some cases your academic performance, among other variables.
Even before you get your interest rate set, however, you can choose between a fixed or a variable interest rate.
Fixed Interest Rates
Fixed interest rates are locked in the moment you sign your loan and won’t change for the lifetime of your repayments, unless you choose to refinance student loans for a better rate.
These interest rates work exactly like federal interest in that they’re pegged to prime lending rates, but they account for the lender’s set range and your personal financial records.
If you have strong credit, or if your cosigner does, you may receive a lower fixed rate than you could obtain with federal loans (something that is particularly useful when you’re refinancing your loans).
Variable rates, on the other hand, are generally much lower than fixed rates, but they are subject to change on a yearly basis. In some cases, variable rates can be as much as 2% to 3% lower than fixed rates when you sign the loan.
However, these figures are pegged to major indices such as LIBOR or prime rates, which can change significantly over a long period.
As such, variable rates are favorable when you plan on paying off your loan quickly (such as during refinancing), but less useful if you’re deferring your payments until you graduate.