Generally speaking, students will want to max out any federal loan options before moving into private ones.
Federal student loans come with the backing of the federal government, which often means they have lower interest rates. They’re also not credit-based, so your credit score and ability to find a cosigner won’t matter, and they offer income-driven repayment plans and other helpful payment options down the line.
Still, despite these benefits, federal student loans aren’t right for everyone. In some cases, a private student loan might actually be a better fit — both for your pocketbook and your goals as a student. Here are just a few reasons you might opt for a private loan over a federal one:
1. You need a bigger loan
If you’re a first-year undergraduate student, you can only borrow $5,500 in total annually in federal loans. Though second-, third-, and fourth-year students can borrow slightly more, it’s often not enough to cover the full costs of schooling.
With private lenders, loan amounts are much larger and less limited. Many companies offer loans well into the hundreds of thousands, depending on the total cost of attendance at your school. Credible can help you compare rates from up to eight lenders at once.
2. You have great credit (or have a cosigner who does)
In most cases, federal student loans have lower interest rates than private ones. The one exception to this rule? That’d be high-credit borrowers.
If you or your cosigner has a particularly high credit score or strong credit history, it could mean qualifying for rates well below current federal interest rates. As of July 2020, these sit at 2.75% for undergrads, 4.30% for graduate and professional borrowers, and 5.30% for parents.
Visit Credible to see which lenders may be open to providing you an affordable loan even with your current credit report.
3. You don’t have a documented financial need
In order to qualify for federal student loans, (direct subsidized loans), you have to prove you need the help, financially speaking. That means if you make over a certain amount or your school costs are low enough, you very well might not be eligible for a subsidized student loan or federal grant.
When this is the case, unsubsidized federal loans or private student loans can be an option. Unsubsidized loans don’t require financial need, and the amount varies based on your year in school. Unlike subsidized loans, they accrue interest while you’re in school, so there are extra costs.
You won’t need to demonstrate financial need with private student loans either. Instead, you’ll just need to show your ability to repay the loan. That means you’ll need a decent credit score and a strong payment history on your credit report. If your cosigner has these things, that should qualify you, too.
See what kind of student loan rates you currently qualify for.
4. You want a variable rate loan
Federal student loans always come with a fixed rate. While this certainly ensures consistency and helps with budgeting efforts, it can also mean spending more in interest over time.
With private lenders, variable-rate loans are often available (see this rate table for an example).
Variable-rate loans allow you to take advantage of market changes and potentially lower your interest costs in the long run. Keep in mind: it could also mean paying a higher rate, too. It all depends on where the market goes.
5. You need fast funding
Federal student aid comes with a long and drawn-out process. You have to fill out your FAFSA form, and wait for the government to receive it, evaluate it, and send their findings on to your school. It’s not a quick or easy feat by any means.
Private student loans typically have much faster processing and funding times. You can usually apply, get approved, and receive your funds in just a matter of weeks (versus months for federal loans).
6. You’re prepared to set up autopay or put in the work
Many private lenders offer discounts to borrowers who set up autopayments or who regularly get good grades. These often equate to lower interest rates and, subsequently, a less expensive loan over time.
Additionally, if you’re willing to shop around for your loan, apply with several lenders, and negotiate your offers, you could also get a lower rate. In the private lending world, companies are competing for your business — and many will make concessions in order to secure it.
A private student loan might be right for you
Private student loans aren’t always the right move, but for some students, they can be a smart way to save money or get quick funding for their education.
If you’re considering a private student loan for your education, make sure to use a tool like Credible to shop around for rates and be careful not to borrow more than you need.
Use a student loan calculator to determine how much you should take out before applying.