April 17, 2021

Weigh Your Private Student Loans and Choose Wisely

By : Ellie Brown

Many students wish to go for higher studies but may face financial constraint. The best option for students is to borrow loans to fund their higher studies.

Students can borrow federal loans involving low-interest rates.

But before borrowing any type of loan, it is important to check the pros and cons of loans from private lenders to make an informed decision.

Loans from private lenders are sometimes known as alternative student loans or 15-minute loans. They are easy to borrow.

Like any other loans, they have their own drawbacks and benefits too. Hence, it is important to weigh both sides to get a clear picture of borrowing a private loan.

Pros

  • Rewarding interest rate

In the case of borrowing a federal student loan, the interest rate is almost the same for everybody, irrespective of the credit amount. The federal loan rates start from as low as 2.75% and going up to 5.4% depending upon the level of education.

Alternatively, with private student loans, your interest rate is largely dependent on your credit amount. Borrowing a large amount may attract a lesser interest rate and vice versa.

  • Higher borrowing limits

Federal loans offer a specific limit. For example, going to an expensive school may have a huge fee, and federal loans may not cater to such high fees. You may not be offered the entire amount, and only partial payment is being approved as your credit limit.

The federal student loans may range from $31,000- $57,500 depending upon the graduation/ under graduation level. These amounts vary as per the need o the students.

Alternatively, with loans from private lenders like Fornitemoney, you can borrow the full amount on your loan. Private student loans can fill up the funding gap and make up the difference created with your federal loans.

  • Statute of limitations

In the case of non-payment of federal loans, there is no way out but to eventually pay back your loans. You may default on your federal loans, but there is no way to escape. Your loan amount may be added to your taxes.

Private student loans have a statute of limitations involved. There is a statute of limitations ranging from 3-10 years at the time of your default. Post this period, lenders are left with very few options to collect the amount from you.

Cons

  1. Ineligibility for federal forgiveness

Federal student loans are beneficial because they provide income-driven repayment plans by capping a small percentage of the loan amount of your income.

Unfortunately, private student loans do not fall in this category and are ineligible for this.

Although some options are available in private student loans, such as deferment or forbearance, they are not as feasible as the percentage capping.

  • Variable Interest rates

The interest rates offered in federal loans are fixed irrespective of the amount and the borrower. The interest rates remain fixed regardless of any fluctuations in the economy.

Whereas the interest rates in private student loans may vary, you may find a variable interest rate for yourself.

There will be a rise in variable interest rates with increasing interest rates, too and may pressure you.

  • No federal subsidy

Few of the federal loans may be offered with a federal subsidy. The subsidy states that the government shall pay your interest in specific situations.

This may save you hundreds and thousands and save you from debt accruement.

Unfortunately, this option is not available in private loans. You might have to make payments even though you are in school and there is no relaxation for the interest rate.

Upon non-payment of the interest rate, it may pile up and add to a huge amount you have to pay once you finish school.

  • Consignee/ consigner

A good credit score plays a significant role in getting a lower interest rate on your debt amount. Federal student loans may not require a consigner, unlike private student loans.

Consigner plays an important role in your debt repayment. If you cannot pay the debt amount, the consigner is responsible for paying back the debt amount.

In case you miss a payment or are declared as a defaulter. It can cause damage to your consigner’s credit. 

  • Not discharged post borrower’s death

One of the benefits of federal loans is that they are discharged post-death of the borrower. The debt amount will be cleared and won’t be counted.

In private student loans, the lenders are still eligible to collect the loans against your property. They can contact and collect the amount from your relatives or friends in case of non-assignment of the consignee.

Some private loans may be declared as default when the consignee passes away.

The final word

Considering the above pros and cons, many private loans may come up with advantages, but it is beneficial to opt for federal student loans. A key tip is to try and fund your education with your savings and scholarships and keep the private loan option as a last resort.

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