1 in 8 families borrowed private student loans in the 2020-21 school year: here’s how to do it right
A college degree can open doors for young adults, leading to higher earning potential and better employment opportunities. But getting a college education is more expensive than ever, leaving millions of graduates with more debt than they can afford.
This is why it is so important to have an open discussion with your prospective student about how their studies will be paid. Most students know how to apply for federal financial aid and scholarships, but the cost of studying will likely exceed these amounts, leading many Americans to take out private student loans to make up the difference.
About 1 in 8 families used private student loans when federal funding couldn’t cover the full cost of college, according to a new report by Sallie Mae. The report adds that private loans can “bridge the gap” in college funding when borrowed responsibly and at competitive interest rates.
Read on to learn more about borrowing private student loans to help pay for your education, and visit Credible to compare rates from several private student lenders at once.
7 OF THE BEST PRIVATE STUDENT LOANS IN 2021
Private student loans make education accessible when federal support is insufficient
Almost 70% of families completed the Free Application for Federal Student Aid (FAFSA), Sallie Mae found, but many of them have appealed for more funding. Even after applying for more money in the form of direct federal grants, scholarships, and unsubsidized loans, additional funding may still be needed.
When federal aid does not cover tuition fees, families typically turn to private student loans or Direct PLUS Loans and Parent PLUS Loans.
PLUS loans are intended to help students and their families meet additional costs that remain after applying for traditional federal direct loans. The main advantage of PLUS loans is that they have the protections of other federal loans, such as income-based repayment plans (ICR) and tolerance for economic hardship.
But PLUS loans are only available to parents and graduate or professional students, so they are not an option for undergraduates who need more funding to pay for their education. PLUS loans also have the highest interest rate of any federal student loan at 6.28% for loans disbursed before July 1, 2022, and the fees are high at 4.228%.
Private student loans, on the other hand, are issued by private lenders. Private loans can have competitive interest rates, based on the creditworthiness, size and term of the loan. The average interest rate on a 10-year fixed rate loan was 5.75% during the week of July 20, 2021, according to data from Credible. For 5-year variable interest rate loans, the average was 2.67%. In addition, some private student loans have no origination fees.
The main disadvantage of private student loans is that they are not eligible for federal protections such as the deferral and forgiveness of student loans. Variable rate loans carry the additional risk that your interest rate will increase over time. But because they can offer lower interest rates than PLUS loans, private loans are a smart choice for families who are confident in their ability to repay.
Responsible private student loans with competitive rates help undergraduate and graduate students close the gap between the cost of higher education and the amount funded by financial aid, federal loans and student resources and families.
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Since private student loan interest rates vary based on a number of factors, it is important to seek the lowest possible rate for your unique situation. You may want to consider working on building your credit score before applying or even hiring a creditworthy co-signer to get a lower interest rate. Some private lenders allow you to set up an automatic debit from your bank account to benefit from an automatic payment discount.
You can compare student loan interest rates from real online lenders in the table below and in Credible Market. Checking your rate is free and does not affect your credit score.
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Estimate your monthly private student loan payment
Private student loans cover the cost of a college education that goes beyond what is offered by federal student aid. But before you borrow private student loans to cover college expenses, make sure you can match your monthly payment to your budget.
It’s easy to estimate your monthly payments using a student loan calculator – just enter your estimated interest rate, loan amount and term. You can see the estimated interest rate on your student loan without affecting your credit score on Credible to make sure your calculations are as accurate as possible.
If you are not happy with your estimated loan repayment, try switching to a longer term loan. If you prefer to pay less interest over the life of the loan, consider a shorter repayment term. You can also choose between fixed rate and variable rate loans to see how it impacts your monthly payment and total interest paid. Private student loans have more flexible repayment options than federal student loans, allowing you to choose the financing terms that suit your needs.
Still not sure if private student loans are the best way for you to finance your education? Contact a knowledgeable loan officer at Credible who can answer your questions about private student loans and student loan refinancing.
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