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, 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 prospective 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, prompting 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” for college funding 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 from multiple private student lenders at once.
7 OF THE BEST PRIVATE STUDENT LOANS IN 2021
Private Student Loans Make Education Accessible When Federal Aid Is Insufficient
Nearly 70% of families have completed the Free Application for Federal Student Aid (FAFSA), Sallie Mae found, but many have filed for more funding. Even after asking for more money in the form of grants, scholarships, and direct unsubsidized federal loans, there may still be a need for additional funding.
When federal aid does not cover college costs, families typically turn to private student loans or Federal Direct PLUS loans and Parent PLUS loans.
MORE ready are intended to help students and their families cover the additional costs left over 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-contingent repayment (ICR) plans and economic hardship forbearance.
But PLUS loans are only available to parents and graduate or professional students, so they’re not an option for undergraduates who need more funding to pay for their college 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 fees are high at 4.228%.
Private student loans, on the other hand, are issued by private lenders. Private loans can come with competitive interest rates, based on creditworthiness, loan amount and loan term. 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 variable interest rates, the average was 2.67%. Also, 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 student loan deferment and cancellation. Variable rate loans carry the added risk that your interest rate will increase over time. But because they can offer better 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 at competitive rates help undergraduate and graduate students bridge the gap between the cost of higher education and the amount funded by financial aid, federal loans, and student resources and families.
HOW DOES THE 10-YEAR TREASURY NOTE AFFECT MORTGAGE RATES?
Since private student loan interest rates vary based on a number of factors, it’s important to seek 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 co-signer to get a lower interest rate. Some private lenders allow you to set up 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 on Credible’s Marketplace. Checking your rate is free and does not affect your credit score.
4 CREDIT UNIONS TO CONSIDER WHEN REFINANCING STUDENT LOANS
Estimate your monthly private student loan payment
Private student loans help cover the cost of a college education that exceeds what is offered by federal student aid. But before borrowing 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 – just enter your estimated interest rate, loan amount and loan term. You can see your estimated student loan interest rate without impacting your credit score on Credible to make sure your calculations are as accurate as possible.
If you’re unhappy 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 this affects your monthly payment and total interest paid. Private student loans offer 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 studies? Connect with a knowledgeable loan officer at Credible who can answer your questions about private student loans and student loan refinancing.
HOW TO AVOID EARLY REDEMPTION PENALTIES
Do you have a financial question, but you don’t know who to contact? Email the Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.