In the past, it has been thought that federal student loans were the best and only way to go. (Read more about the differences between federal and private student loans here.)
Interest rates and other aspects that you have come to know were almost always defined by federal regulations. However, when you take a step back and look at federal student loans at general, they tend to be higher over the long-term. Students often end up paying more because they have so many options for deferment and forbearance.
Experts all recommend to students entering school to pay off their loan within ten years after graduation. Many of them do not do this. This isn’t surprising. Grads are focused on getting a job after they leave school, and can’t afford the loan payments immediately after graduation.
However, sometimes a month becomes six months, and six months becomes a year. Before you know it students are asking for another extension or forbearance. Interest continues to accrue during this time.
Any other kind of loans will require that you make regular payments. You might not be as likely to get a deferment or forbearance from private lenders.
Are private student loans right for you?
However, private lenders are not for everyone. While they have assumed a great deal of the responsibility of student loan disbursement, this is a relatively new thing. Many people don’t even know that companies like Facebook and Amazon are starting to give out student loans to people who want to focus on technology or a related field.
As FinTech continues to grow in our modern world, there will be even more opportunities for non-traditional loans like these.
Bankers are equipped to handle finances, but not the advanced technology that students have come to depend on to make it through college. AI and machine learning has taken hold in the educational environment and any schools that don’t use this technology will be left behind.
We defined a few groups of people that might better benefit from private loans than from federal loans. Look over this list and see if your child may qualify for any of these categories and then just think about whether a private loan is better for your child.
Questions to Ask Yourself
When considering when to pick private student loans, consider the following factors:
- Have you determined that federal loans are not right for you?
- Do you prefer to deal with a private lender?
- Do you plan on considering refinance of your loan at some point?
- Do you currently have a credit card account with the private lender?
- How high is your credit score?
All of these factors are important in deciding when to pick private student loans. Federal student loans are still a preferred method of borrowing if you don’t overborrow, but this depends on the type of federal loan you get.
What to Keep in Mind
With private loans, you are at the mercy of the company. It’s wise to choose a company that you know or where you already have a credit account. This might increase the chances that the lender will work with you.
Having a top credit score is a requirement with private loans. This is not the case with federal loans. So, if credit scores are sagging, it’s best to try for a federal loan.
The old saying, “begin with the end in mind” is a good one to consider when trying to decide when to pick private student loans.
Additionally, there may be certain times of the year that are better to apply for private loans, such as a few months before a school term begins. Private companies are well aware of the deadlines of many of the colleges. They intentionally offer good deals for borrowers shortly before a new term begins.
Mark Kantrowitz, a leading student loan expert, believes that the best times to borrow private student loans are when you don’t qualify for federal loans, parents are unable to borrow due to other debts or circumstances, students who are only taking courses with no intent to degree, and a few other cases.
If any of these cases apply to your situation, your best bet may be to get a private student loan.