Analysis of alternative student loans
When many of us think of student loans, we think of federal debt, and for good reason. Almost $1.3 trillion of the $1.44 trillion in outstanding U.S. student loan debt is held in the federal portfolio.
The remaining $140 billion is made up of private student debt. Sometimes called alternative student loans, this type of debt carries several pros and cons when compared to federal loans.
Before taking out any loan or debt, be sure to make the right decision. Learn possible benefits and disadvantages of alternative student loans before riding ahead!!
2 HELPFUL PROS OF ALTERNATIVE STUDENT LOANS
When it comes to private student loans, there are some key advantages. You might be surprised at what you can get if you move away from federal student loans.
REWARDS FOR EXCELLENT CREDIT
With most types of federal student loans, your credit doesn’t matter. Your interest rate is set by Congress; everyone has the same rate, regardless of credit.
With private student loans, though, you can be rewarded if you have excellent credit. You may find rates starting as low as 2.47%. Current federal student loan rates are higher, especially if you are going to graduate school.
YOU ENJOY HIGHER BORROWING LIMITS
In many cases, alternative student loans come with higher borrowing limits than federal debt. If you’re going to a pricey private school, you might not be able to get the amount you need if you rely solely on federal student loans.
With federal student loans, your aggregate amount borrowed can be no more than $57,500 as an undergraduate. For graduate student loans, the cap is $138,500 — including what you already received as an undergrad.
Depending on your degree level, you can borrow up to 100 percent of your cost of attendance with alternative student loans.
3 SERIOUS CONS OF ALTERNATIVE STUDENT LOANS
While there are some real advantages to private student loans, they’re balanced by some inescapable drawbacks.
INTEREST RATES VARY
Your federal student loan interest rates are fixed for the duration of the loan. They will never change, regardless of what happens in the national economy.
Though some alternative student loans also offer fixed rates, this isn’t always the case. Instead, you might find yourself with a variable rate. If interest rates rise over time, so does your variable interest rate and your monthly payment.
NO SUBSIDY BY THE FEDERAL GOVERNMENT
Depending on your loan type, some federal student loans come with an interest subsidy. If your debt is eligible, the government will pay your interest while you’re in school or even in repayment. Interest won’t accrue, saving you hundreds or thousands on your debt.
When you use private student loans, that’s not an option. Interest begins accruing from day one, and in some cases, you might be required to make interest payments while you’re still in school. If you don’t pay the interest as you go along, it’s all added to your debt when you finish school.
A COSIGNER IS MOSTLY ALWAYS NEEDED
Though most federal student loans don’t require a cosigner, you might need one for your private student loans — even if you have good credit. When I received my private student loan for grad school, I had to get a cosigner, even though I had a credit score above 700. The reason? I wouldn’t be working while in school.
A cosigner is legally responsible for your debt if you’re unable to repay it. If you miss a payment — or worse, default on your loans — your cosigner’s credit will be damaged and collectors can go after them for payment.
As a result of these terrifying cons it is never a bad idea to get help when looking to take out an alternative student loan.
Even though alternative student loans come with some advantages, the reality is that many students are better off starting with federal student loans.
Start with federal loans when possible!!!
When funding your education, start by using your savings and applying for scholarships. Next, turn to federal student loans.
Turn to private student loans when you can’t close your funding gap by other means.