Top Ten Reasons You Should Not Borrow Private Student Loans
By Mark Kantrowitz
Student loans are a wart on your financial future. The more you
borrow, the more difficulty you will have trying to repay the
debt. Borrow as little as you need, not as much as you can.
Here are some of the many reasons why you should not borrow private
student loans. If you are thinking about borrowing a private student
loan or a private parent loan, read this list carefully, so that you
can make an informed decision.
- Needing to borrow a private student loan or Federal PLUS
loan may be a sign of over-borrowing. The Federal Stafford loan
limits should be sufficient for most students. Students who borrow
private student loans or Federal PLUS loans are much more likely to
graduate with more debt than they can afford to repay. For example,
students who borrow private student loans are more than four times as
likely to graduate with more than $50,000 in student loan debt as
students who borrow only federal student loans.
- Private student loans do not offer income-driven repayment
plans. Income-driven repayment plans, like income-based repayment
and pay-as-you-earn repayment, base the monthly payment on a
percentage of the borrower's discretionary income, not the amount
owed. This provides the borrower with a safety net, in case the amount
of student loan debt is out of sync with the borrower's income after
- Private student loans do not offer loan forgiveness
programs. Federal student loans provide public service loan
forgiveness, teacher loan forgiveness and other loan forgiveness
programs. Private student loans do not.
- Private student loans provide limited options for financial
relief. Private student loans limit forbearances to about a year
in total duration. This is in contrast with federal student loans,
which provide up to three years of deferments and forbearances. Some
private student loans require the borrower to start making payments
during the in-school period.
- Most private student loans do not provide death and
disability discharges. Only about a third of private student loan
programs provide death and disability discharges, unlike federal
student loans. Nobody expects to become disabled, but nearly 10% of
the U.S. population has a severe disability.
- Most private student loans require a cosigner. Most
students have a thin or non-existent credit history and will need a
creditworthy cosigner to qualify for a private student loan. Of
private student loan borrowers, more than 90% of undergraduate
students and 75% of graduate and professional students needed a
cosigner to qualify for private student loans. In most cases, the
cosigner will be equally obligated to repay the debt for the life of
- Private student loans charge higher interest rates for
borrowers with bad credit. Borrowers with bad credit are unlikely
to qualify for a private student loan. Even if the borrower qualifies
for the private student loan, the interest rate will be much
higher. This is in contrast with federal student loans, which are made
available without regard to the borrower's credit scores or
debt-to-income ratios and which offer the same fixed interest rate to
all borrowers, regardless of credit quality. The fixed interest rates
on federal student loans may also be lower than the fixed-rate
equivalent of the interest rates on private student loans.
- Many private student loans have variable interest rates.
More than half of private student loans have variable interest rates,
which have nowhere to go but up. Some variable interest rates do not
have caps and can increase to 18%, 21% or more. In contrast, all
federal student loans have low fixed interest rates. Private student
loans that offer fixed interest rates usually require a shorter
repayment term than loans with variable interest rates. Interest on
private student loans is also unsubsidized, unlike some Federal
student loans. With a subsidized Federal student loan, the federal
government pays the interest during the in-school and grace periods,
and other periods of authorized deferment. Also, the interest on
private student loans may be capitalized more frequently than the
interest on unsubsidized Federal student loans.
- Higher loan limits mean more debt. Federal Stafford
loans have annual and cumulative loan limits, which prevent
over-borrowing. Private student loans have much higher loan limits,
sometimes up to the full cost of attendance minus other aid (just like
the Federal PLUS loan). These generous loan limits can contribute to
students graduating with more debt than they can afford to repay.
- Private student loans are forever. They don't disappear if
you file for bankruptcy. It is almost impossible to discharge
private student loans in bankruptcy. Like federal student loans,
getting a bankruptcy discharge of private student loans requires an
adversarial proceeding in which the borrower must demonstrate that
repaying the loans will impose an undue hardship on the borrower and
the borrower's dependents. Most bankruptcy court judges interpret this
as requiring a "certainty of hopelessness."