You may have heard about private student loans. Some of the information floating around about private loans can be similar to Bigfoot sightings – you hear a lot of stories, but they often aren’t based on facts. In this article, we’ll take some common misconceptions about private student loans and give you the facts.
#1 – Myth: Private Student Loans Only Offer Variable Interest Rates
One of the most common myths about private student loans is that they’re only available with riskier variable interest rates. In reality, most private loan providers offer borrowers a choice between a fixed interest rate and a variable interest rate. Depending on your individual circumstances, one may be more appealing than the other. Read more about choosing a variable or fixed interest rate to see what important factors should be considered when choosing your type of interest rate. Additionally, highly qualified borrowers can likely find private student loans with low interest rate options.
#2 – Myth: Private Student Loans Have High Origination or Application Fees
The reality is that most private loan providers currently charge NO upfront fees, also known as origination or application fees. In addition, there is typically no penalty or fee to make extra payments or to pay off the loan early (i.e., no prepayment penalty or fees). Although most private loan providers offer loans with no upfront fees, we still encourage you to research your options and verify any fees or charges associated with a lender’s loan products.
#3 – Myth: Private Student Loans Require Immediate Repayment While You are Still in School
As a borrower, you have various repayment options offered by different private loan providers. Most private loan lenders will have an option to delay or postpone payments while you are enrolled at least half-time as well as a six-month grace period following your graduation or last date of at least half-time enrollment. This gives you the option to not make payments while enrolled in school as long as you are enrolled on at least a half-time basis. This can give you some added flexibility while you are focused on your studies. However, if you are able to make payments while in school, even if payments are only on the accruing interest, you can save yourself some money and keep your overall loan costs lower. You can find additional ways to save money on your student loans here.
#4 – Myth: Private Student Loans Have No Deferment or Forbearance Options if You Have Difficulty Making Payments
You’ll want to check with your prospective private loan lenders, but most offer options to postpone payments if you encounter some type of financial hardship that makes it difficult to make your private student loan payment. Most private loan lenders will provide you a hardship forbearance to temporarily postpone payments.
Additionally, many private loan lenders offer deferments to postpone payments for certain circumstances such as returning to school, while in an internship or residency, or during other approved events as determined by your private loan lender. Again, check with your private loan lenders to see what options are specifically available.
#5 – Myth: Federal Student Loans are Always Cheaper than Private Student Loans
As a general rule, you should always explore your options in the federal student loan programs first before taking out any private student loans. Federal student loans will typically provide you a greater degree of flexibility with repayment options and various forgiveness provisions. You can read a good overview of federal and private student loans here.
However, in terms of the actual financial aspect, many private student loans can have interest rates as low as or even lower than federal student loans. Federal student loans also have a nominal origination fee charged to borrowers. As discussed earlier, most private loans do not have any origination or application fees. Several private loan lenders now offer a private loan designed specifically for parents to use to pay educational expenses for their student. Parents have found that these private loan options often have lower interest rates compared to the federal PLUS loan for parents.
We hope you have a better understanding of private student loans and are better equipped to make informed decisions regarding your education financing options. Research your options to find what works best for your individual circumstances and don’t believe every myth you hear. But, if you happen to see Bigfoot in the cafeteria on campus, snap a pic – you just might be able to sell it and pay off your student loans!