If you’re pursuing an educational path where you know the costs of your schooling will exceed your scholarships, grants, and federal loans, you may want to consider private student loans. It’s important to understand the differences between federal and private loans so you know what you’re getting into and can protect your financial future, no matter how much debt you graduate with. Federal loans are at fixed rates and are set at the moment you take out the loan.
And while some benefits of federal loans are typically not possible with private loans, if you need additional funds, this may be the route you need to go to pursue the degree you want. Here are some things to pay attention to, and questions to ask yourself if you’re considering private student loans.
Can you afford to pay back what you’re borrowing?
One rule of thumb suggested for student loans is that you shouldn’t borrow more than you earn in your first year out of college. But for some careers, this may not be apt. For instance, doctors, dentists, and lawyers will rapidly begin earning more each year they are on the job and can deal with a somewhat higher debt load. But for jobs like marketing, teaching, and accounting, the first year salary rule is a prudent approach. Try out this calculator to see what your recommended maximum student loan debt is.
Are you doing everything you can to minimize your debt?
Many students take a “college is the time to party” approach to their higher education, but this can set you up for a much rougher time after college. Buckling down and taking the highest possible course load can get you out of college a year earlier. This can prevent a year’s worth of borrowing. And working during school and over summers can allow you to borrow less and pay your interest so it doesn’t accrue while in school and drive your debt up. Working and taking a higher course load may not sound like fun, but knuckling down now can make a huge difference in how hard or easy the decade after graduation is financially. So if you must take out private loans, use sparingly!
Do you want a fixed or variable interest rate?
Federal student loans are at a fixed rate currently based on the 10 year Treasury note yield, plus an added percent. Currently, they are at 3.86% for undergraduate loans. Graduate loans are at 5.41%, and PLUS loans to students and parents are at 6.41%. These rates will remain fixed unless you consolidate, and then the rates will be averaged. Private student loans can be either fixed or variable. Variable rates move along with a key indicator (like LIBOR) and can change many times over the life of your loan. Depending on the lender these can vary widely. Sallie Mae, for instance, offers variable rates ranging from 2.25%-9.37%. Fixed rates with this lender run 5.74%-11.85%. Fixed rates offer certainty, but are higher. Variable rates are lower to start with, but then represent a gamble of sorts.
Will you need a co-signer?
If you can find a co-signer with good credit, you’ll get a lower rate. This makes financial sense for you, but if anything happens and you can’t afford your loans, the debt will fall back on your co-signer. That’s a significant downside, but the upside is the much lower rates you can obtain. We recommend that you look for a lender that offers co-signer release. What this means is that, after a certain number of on-time, in-full payments, your lender allows your co-signer to be removed from the loan, and the debt and associated risk become 100% yours. This is preferable to a loan without this feature, and should be a key consideration when comparing lenders.
Taking on private student loans is a big step and one that should not be made lightly. Private student loans can be a great advantage if you’re pursuing a career that will result in higher than average wages, but also necessitate costly education. It’s important that you understand the terms of your loans and meet all of the requirements to pay them off according to the terms and conditions. What helps is always knowing how much you owe and how much this debt represents in monthly payments. Sign up for Tuition.io’s free student loan tool to keep track of your debt and have all the information you need from the time you take your first loan to the moment you make your last payment and celebrate the end to your student loans.