When Does It Make Sense to Consider a Private Student Loan?

When you or your child are preparing to go to college, you know that financing higher education can be a difficult feat. College is expensive, and scholarships, work study, savings, federal loans and grants don’t always cover the full cost. In this case, you may need to take out a private student loan to help fill the gaps.

For many college-bound students, private student loans are a financial lifeline. They’re a way to bridge the gap between the cost of education and available funding.

What Are Private Student Loans?

While federal student loans are backed by the government, private student loans are offered by banks, credit unions and online lenders. There are many types of private student loans to choose from, with different loan terms, interest rates and other benefits that fit your unique situation.

The main difference between private student loans and federal loans is that private loans are subject to approval, like a credit card would be. This means that students with young or poor credit history may need a co-signer to be approved for private student loans. However, having a co-signer can be helpful in other circumstances, such as securing a more favorable interest rate.

Additionally, private student loans aren’t determined based on financial need. They also have higher borrowing limits than federal loans do. Private student loans can cover up to a school’s full cost of attendance—regardless of whether your family can contribute financially. 

Benefits of Private Student Loans

Private student loans are critical to funding many students’ education. But what a lot of people don’t realize is that they also come with some great benefits.  

1. Private student loans help pay for the full cost of school

A college education is expensive. Most financial aid packages students receive don’t cover the full cost of college. Federal loans are capped each year, meaning you’re limited on how much you can borrow through their loan programs. Certain federal aid programs such as Pell Grants and subsidized loans help students who have demonstrated financial need, but not all students qualify. Even if you do qualify, the amount offered may not cover the full cost of your degree. 

Private student loans can fill these gaps, providing the full amount of money you need to pursue your education. This means you don’t have to struggle to pay for the remaining costs out of pocket. 

When you apply for a private student loan, your school will certify the final costs. Your loan will include only the amount you need after federal aid and scholarships are applied. You may be able to borrow per semester or for the full year, depending on your needs. 

2. Private student loans cover a variety of degree types

Private student loans aren’t just applicable to undergraduate programs. Students can use them for a variety of degree types, from an associate degree to specialized graduate programs. Some financial institutions will personalize their private loans based on the degree type. This can offer an added level of flexibility, depending on how long you’ll be in school and what your post-graduate salary might be.

For some degrees, private student loans might be preferable to federal loans. For example, federal loans for graduate programs tend to be more expensive, with higher interest rates than undergraduate student loans. You may be able to get a private student loan with a lower rate for your graduate program. 

3. Private student loans have flexible terms and repayment options

Private student loan terms and repayment plans can vary dramatically. Students who shop around for student loans are more likely to find options that fit their unique situations.

For example, private student loan terms may be 5, 10, 15 or even 20+ years. Shorter loan terms typically come with higher payments, but you can pay off the loan faster. Longer loan terms may have lower payments, but you’ll be paying the loan off for more years, and you may pay more in interest. These options give you the ability to find a loan timeline that works for you.

Different private loans also may have repayment options that suit your individual needs. Some lenders may let you defer repayment until after graduation. Others, including Navy Federal Credit Union, require small payments during college. Making payments during school helps you get ahead on repayment.

4. You may be eligible for a lower interest rate with a private student loan

Private lenders use your credit history to determine approval and student loan interest rates. If you or your co-signer have a high credit score, you may be eligible for private student loans with more favorable rates. 

It’s even possible to get a lower interest rate on a private student loan than you’d get on a federal student loan. That can save you a lot of money over the life of the loan.

5. Private student loans can help you build credit

Most college students don’t have much credit history. In these cases, private student loans provide an opportunity to start building credit. Making private student loan payments on time can help you build credit throughout your college years. 

Good credit is virtually a necessity for future financial endeavors. You’ll need it for everything from renting an apartment to getting a car loan. Therefore, a private student loan may help you build necessary credit for your long-term financial future. By managing your loan well, you can potentially improve your credit status. 

Find the Right Private Student Loans for Your Situation

Many students have applied for a private student loan to pay for their higher education. If you’re in this situation, you can take several steps to prepare.

First, research lenders and assess your eligibility. Is your degree type accepted for the loan you want? Do you need to be a member of the credit union you’re applying through? Do you have established credit history, or will you need a co-signer? Ask your lender questions to make sure their private student loan options are a good fit.

Next, compare benefits and features, such as origination or applications fees, co-signor release options, interest rate discounts and repayment flexibility. Then, consider your overall financial situation. Decide how you’ll repay all your loans—federal and private—after graduation, including interest. 

It’s important to make informed decisions about private student loans. Seek advice about student loans from a variety of sources, so you can make a choice that makes sense for your situation. Having a plan will ensure you take on and manage that debt responsibly.

Navy Federal offers several student loan options to make financing your education easier. Learn more about our private loan and refinance offerings and start your college journey off on the right foot.