1 in 8 families borrowed private student loans in 2020-21 school year: Here's how to do it right
About 13% of college students and their families took out private student loans to help cover the costs of a university education, according to Sallie Mae. Here's how to know if private student loans are right for you. (iStock)
A college degree can open doors for young adults, leading to higher earning potential and better job opportunities. But getting a college education is more expensive than ever before, leaving millions of graduates saddled with more debt than they can pay off.
That's why it's so important to have an open discussion with your soon-to-be college student about how their education will be paid for. Most students know to apply for federal financial aid and scholarships, but the cost of college 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 financing couldn't cover the full cost of college, according to a new report from Sallie Mae. The report adds that private loans can "bridge the gap" for college financing when borrowed responsibly and with a competitive interest rate.
Keep reading to learn more about borrowing private student loans to help pay for college, and visit Credible to compare rates across multiple private student loan lenders at once.
7 OF THE BEST PRIVATE STUDENT LOANS IN 2021
Private student loans make education attainable when federal aid falls short
Nearly 70% of families filled out the Free Application for Federal Student Aid (FAFSA), Sallie Mae found, but many of them filed an appeal for more financing. Even after requesting more money by way of grants, scholarships and federal direct unsubsidized loans, there may still be a need for additional funding.
When federal aid doesn't cover the costs of college, families typically turn to private student loans or federal Direct PLUS Loans and Parent PLUS Loans.
PLUS loans are meant to help students and their families cover the extra costs that are leftover after applying for traditional federal direct loans. The primary benefit of PLUS loans is that they have the protections of other federal loans, such as income-contingent repayment plans (ICR) and economic hardship forbearance.
But PLUS loans are only available to parents and graduate or professional students, so they're not an option for undergraduate students who need more financing to pay for college. PLUS loans also have the highest interest rate of all federal student loans at 6.28% for loans disbursed before July 1, 2022, and fees are high at 4.228%.
Private student loans, on the other hand, are issued by private lenders. Private loans can come with competitively low interest rates, which are based on creditworthiness, loan amount and loan length. 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 loans with a variable interest rate, the average was 2.67%. Plus, some private student loans have no origination fee at all.
The primary drawback of private student loans is that they are not eligible for federal protections like deferment and student loan forgiveness. Variable-rate loans come with the added risk that your interest rate will increase over time. But because they may offer more favorable interest rates than PLUS loans, private loans are a smart choice for families who are confident in their repayment ability.
Responsible private student loans with competitive rates help undergraduate and graduate students bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans, and students’ and families’ resources.
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Since private student loan interest rates vary based on a number of factors, it's important to shop around for the lowest possible rate for your unique situation. You may consider working on building your credit score before applying or even enlisting the help of a creditworthy cosigner to get a lower interest rate. Some private lenders let you set up auto debit from your bank account to receive an automatic payment discount.
You can compare student loan interest rates from real online lenders in the table below and on Credible's marketplace. Checking your rate is free, and it doesn't impact your credit score.
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Estimate your monthly private student loan payment
Private student loans make it possible to cover the cost of a college education that exceeds what's offered by federal student aid. But before you borrow private student loans to cover college-related expenses, make sure you can fit your monthly payment into your budget.
It's easy to estimate your monthly payments using a student loan calculator — you just need to enter your estimated interest rate, loan amount and loan length. You can see your estimated student loan interest rate without impacting your credit score on Credible to ensure your calculations are as accurate as possible.
If you're not happy with your estimated loan payment, try switching to a longer-term loan. If you'd rather 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 that impacts your monthly payment and total interest paid. Private student loans have more flexible repayment options than federal student loans, which lets you choose the financing terms that fit your needs.
Still not sure if private student loans are the best way for you to finance your education? Get in touch with a knowledgeable loan officer at Credible who can answer your questions about private student loans and student loan refinancing.
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