Private Loans Do Not Offer the Same Benefits
One of the first key differences between federal and private student loans is that private student loans do not offer the same benefits that federal loans do. In fact, you will find that private student loans can be much harder to work with should you find yourself in a tough financial spot.
Private student loans may not have deferment, forbearance, and flexible payment options and this means that what you owe is what you owe and it needs to be paid on time, every month.
Private Loans Have Variable Interest Rates
Another thing you need to know about private student loans is that they offer variable interest rates. While that may sound like a good thing to you now, it may not end up so well later on down the road. For example, a federal student loan may come with an interest rate of 6.8 percent fixed, but a private student loan may have a 4.5 percent variable rate. It seems like a better option to choose the 4.5 percent, but in three years, that rate may change to 8.5 percent while the fixed rate remains at 6.8 percent no matter what.
If you do opt-in for a private student loan, search for one with a fixed interest rate or understand that a variable rate may mean you pay a higher interest rate later on down the road.
Private Loans Decide How Much You Borrow
Private student loans can either be really helpful or very tight when it comes to money. Private lenders can offer you as much or as little of a loan as they want to. Most banking institutions will only cover the cost of your tuition and education related expenses, so there is normally not any money left over after you pay for your schooling.
On a side note, private student loans are generally helpful when you need to borrow more than what is allowed from the federal student loan program.
Private Loans Are Harder to Obtain
Private loans may seem like they are easier to obtain than a federal loan, but they are not. In fact, to receive a private student loan, you will usually need to have stellar credit history, a high credit score, and steady employment with a predictable income. If you do not have these things, you will be denied. Some students even find that they are denied simply because they are students and do not have enough of an employment or credit history.
It is not impossible to receive a private student loan if you have bad credit, but to obtain the loan, you will need a cosigner who meets the minimum qualifications. If you do have bad credit, you can work to rebuild your credit and then apply again.
Private Loan Repayment Starts Right Away
Private student loans do not have any type of deferment period and you will be responsible for paying your loan back right away, even while you are in school. Federal student loans are not required to be paid back until six months after you graduate or drop below part-time status.
Canāt Get Rid of Them
Private student loans are stuck with you no matter what and they cannot simply be pushed to the side. In fact, the only way to get rid of your private student loan is through dismissal in bankruptcy court or through a permanent or total disability. You will find that defaulting on a private student loan is a serious thing and can yield some serious consequences.
If you are interested in private student loans, it is important to understand what they are and what they offer you. If you have any questions about them, speak with your loan provider today.
Photo: Flickr: GotCredit
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