3 Reasons to Take Out Private Loans for College

Private loans tend to get a bad rap, but they can be a useful, reasonable means of funding an education. 

Going to college often hinges on taking out student loans. But not all student debt is created equal. When borrowing, you get the choice of federal student loans or private student loans.

Federal loans are the more favorable option of the two, as they offer numerous benefits. Federal student loan interest rates are capped at a reasonable level and fixed throughout the life of your repayment period. They also come with borrower protections that make paying back that debt less burdensome -- options like income-driven repayment plans, deferment, and forbearance.

Woman approaching an ATM.

Image source: Getty Images

Private lenders, by contrast, can charge as much interest as they want. In fact, the lower your credit score is when you apply for private loans, the more interest you'll to pay. Private loans also don't come with the same protections as federal loans, so those who struggle to pay them back are often left without relief (although many private lenders will negotiate repayment terms for struggling borrowers -- more to ensure that they get repaid eventually than out of the goodness of their hearts). 

And although it usually makes sense to avoid private student loans, there are some circumstances under which borrowing privately does make sense. Here are a few such scenarios.

1. You've maxed out your federal borrowing options

The problem with federal loans is that you're only allowed to borrow a certain amount through the U.S. Department of Education. If your parents list you as a dependant on their taxes, you can take out up to $31,000 in federal loans throughout all of your undergraduate studies.  

It's often best to choose a school where that cap works. For example, if your parents have some money available to pay for your education and you're able to max out your federal loans, you may have enough money to pay for tuition at an in-state public college. In this case, you're generally better off than borrowing privately to attend a pricier school.

The exception, however, is when you've gotten into a specialized program that aligns with your desired career path and you need private loans to afford it. In that case, borrowing privately may be worth it because it'll set you off on the path to the line of work you want to get into. 

2. You have excellent credit

Although your credit score isn't taken into account when you apply for federal loans, it's a huge factor in determining your eligibility for private loans. And it dictates the sort of interest rate you snag on those loans if approved.

If your credit is poor, you may get stuck paying exorbitant amounts of interest when borrowing privately. But if you've been working to maximize your credit score or you have a student loan co-signer (say, a parent or sibling) whose credit is excellent, it could pay to borrow privately if you snag a low interest rate in the process. 

3. You expect to pay back your loans quickly

The problem with taking out a high-interest loan is this: The longer you carry that debt, the more it costs you interest-wise. But if you need a small amount of private student loans to complete your education, and you expect to get a good enough job to repay that loan quickly after college, it may not be such a terrible thing. Especially if borrowing privately helps you avoid having to defer your studies and helps you kick off a lucrative career. 

It's always wise to max out your federal borrowing options before resorting to private loans for college. But if any of the above situations apply to you, it may be worth it to see what private loans you qualify for.

Save thousands on student loan interest

Many people are missing out on lower student loan interest rates because they don't take the time to research their refinancing options. Our picks of the best student loan providers can help you save thousands of dollars in interest over time. Click here to uncover the best-in-class student loans providers we could find in 2019.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More