You may have heard about private student loans. Some information about private loans is like a Bigfoot sighting. There are a lot of stories, but they often aren’t based on facts. In this article, we’ll look at each private loan myth and give you the facts.
Private Loan Myth #1: 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.
Private Loan Myth #2: 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. There is no fee to make extra payments or to pay off loans early. Although most loan providers offer loans with no upfront fees, research your options. Be sure to verify any fees or charges associated with loan products.
Private Loan Myth #3: 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 lenders have an option to delay or postpone payments while enrolled at least half-time. They also offer 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 can make payments in school, even if only the accruing interest, you can save money and keep your loan costs lower. You can find additional ways to save money on your student loans here.
Private Loan Myth #4: Private Student Loans Have No Deferment or Forbearance Options if You Have Difficulty Making Payments
Most lenders offer options to postpone payments if you encounter some type of financial hardship. (You may want to check to be sure.) Most private loan lenders provide a hardship forbearance to temporarily postpone payments if you find it difficult to make payments.
Many private loan lenders also offer deferments. Deferments can postpone payments for certain circumstances. These circumstances include returning to school, having an internship or residency, or during other approved events. Again, check with your private loan lenders to see what options are specifically available.
Private Loan Myth #5: Federal Student Loans are Always Cheaper than Private Student Loans
As a general rule, explore your federal student loan options first before taking out any private 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, 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 lenders now offer private loans designed specifically for parents for their students’ educational expenses. Parents find these loan options often have lower interest rates compared to federal Parent PLUS loans.
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!