Although 9 of 10 student loans originate with the federal government, there are also situations when it’s wise to pick a private lender.
And then there are other times when the choice might be completely out of your hands.
Although federal loans can often be the better option, consider these three scenarios when you might be forced (more or less) to resort to private loan debt instead.
1. You bumped up against the federal loan borrowing limit
You might not be surprised to learn that, yes — breaking news — college is expensive.
If you’re an undergraduate attending an in-state public university on a four-year program, you could expect to pay an average of $9,410 per year in tuition and fees, according to the College Board. The costs rise significantly for out-of-state public school students ($23,890) and their private school peers ($32,410).
But it could come as a shock that you might not be able to borrow enough in federal loans to cover your pricey cost of attendance. Consider the Federal Student Aid office’s limits on borrowing direct loans:
- First-year students: Between $5,500 (dependents) and $9,500 (independents)
- Second-year students: Between $6,500 (dependents) and $10,500 (independents)
- Third- and fourth-year students: Between $7,500 (dependents) and $12,500 (independents)
- Total limit for undergraduates: Between $31,000 (dependents) and $57,500 (independents)
Keep in mind that dependent students whose parents aren’t able to borrow parent PLUS loans are allowed to borrow as much in direct loans as their independent peers — still, that could keep you from financing your freshman year.
Even if a parent is willing to borrow up to your cost of attendance in PLUS loans — only parents and graduate students are eligible for the program — they might be scared off by the interest rates. As the government’s priciest school loan program, PLUS loans carried a 7.60% interest rate for the 2018-2019 academic year.
Private student loans also allow you to cover up to 100% of your school’s cost of attendance, but potentially at a lower price tag. It would award an interest rate based on your credit history, or your cosigning parent’s history. Fixed rates from top lenders started as low as around 5.30% in December 2018.
2. Your household income is through the roof
By submitting your family’s income tax return information to complete the Free Application for Federal Student Aid (FAFSA), you’re sharing a clear sign of your household’s wealth. And although no income limit prohibits you from receiving federal financial aid, including grants and loans, you might not get anything if mom and dad are significantly well-off.
After all, the FAFSA pumps out your Expected Family Contribution (EFC). An especially high EFC could potentially lead to zero federal aid on your college award letter.
It’s still wise to file a FAFSA — and use the FAFSA4caster if you’re champing at the bit to see what you’ll be offered. Your school’s net price calculator can also project your federal aid and assistance from other sources.
Even if your parents earn big salaries, you might be surprised by these tools’ results, particularly if you’re in an exceptional situation, such as:
- Your family has multiple children attending college at the same time.
- Your family is experiencing an economic hardship, such as a stack of medical bills.
- You’re a dependent student, but your parents are unwilling to help pay for college.
If you find that your parents’ income is blocking federal aid, speak with your school’s financial aid office and rack up as much gift aid as possible before borrowing. You might seek grants from your home state or scholarships from private organizations.
Private loans could be a helpful last resort. Your parents’ income could help you obtain a loan, and at a lower rate if they qualify — that is, if your parent agrees to apply on your behalf or cosign your application. That’s because lenders generally award lower rates to borrowers (and cosigners) with debt-to-income ratios leaning in the right direction.
3. Your residency status disqualifies you for federal student aid
Without U.S. citizenship, a green card or special refugee status, you might find yourself ineligible for federal student aid. Undocumented students, including those covered by Deferred Action for Childhood Arrivals (DACA), for example, aren’t currently eligible for federal grants and loans.
It could be possible to receive gift aid from the state where you live or the school you plan to attend. DACA students, for example, have a range of financing options that stretch beyond the federal government.
Once you’ve exhausted your options for grants and scholarships, however, it might still be necessary to borrow. The good news is that private student loans could be an option. You don’t need to be a U.S. citizen or permanent resident, but you’ll need a cosigner who does enjoy that status — maybe a relative or friend.
EdVestinU, for instance, is among the private lenders that require you to bring an eligible cosigner aboard for your loan application. You would also have to meet traditional requirements, such as attending an accredited school at least half-time.
If you’re unable to find an eligible cosigner, there are lenders with even more lax eligibility requirements, including MPower Financing and Prodigy Finance. Just remember that, without a creditworthy cosigner’s backing, you might be quoted a higher interest rate, complicating your loan repayment once you’re out of school.
Before you borrow private student loans…
The best reason to resort to private student loans is that you’ve exhausted every other option available to you. Ideally, you’ll want to hound your school’s financial aid office, scour your state’s resources for aid and apply for more scholarships than you count.
At that point, however, you might find yourself ineligible for (more) federal student aid, whether from grants, work-study programs or loans.
It’s also wise to treat private loans as a last option because, unlike federal loans, they come with fewer repayment protections. You wouldn’t be able to switch repayment plans, receive mandatory deferment or forbearance or apply for loan forgiveness, the way you would with a federal student loan.
But if you’re left with private loans as your remaining path to affording college, make sure to find the best lender and loan terms for your situation. This way you’ll likely have a much easier time paying off those loans and getting on with your life.
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Here are our top student loan lenders of 2019!
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
|4.25% – 13.25%1||Undergraduate and Graduate|
|4.07% – 12.78%2||Undergraduate, Graduate, and Parents|
|4.84% – 13.49%3||Undergraduate and Graduate|
|4.62% – 11.47%*,4||Undergraduate and Graduate|
|4.38% – 13.38%5||Undergraduate and Graduate|
|5.85% – 6.99%6||Undergraduate and Graduate|
|3.93% – 9.81%7||Undergraduate, Graduate, and Parents|
|4.48% – 12.35%8||Undergraduate, Graduate, and Parents|
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