When it makes sense to apply for a private student loan
Over the last few years, persistent inflation has impacted the cost of everything from fuel to groceries, adding strain to many people's budgets. But those aren't the only costs that are rising. Over the last decade, the cost of higher education has also grown significantly — and it's now more expensive than ever.
The average tuition cost has grown at an annual rate of about 2% since 2001 — and has more than doubled in the last decade, according to data from the Education Data Initiative. The cost of tuition, supplies, books and daily living per student now averages $36,463 per year, which makes it difficult for many students and families to pay out of pocket.
Luckily, there are other options for paying for your higher education, like grants, scholarships and federal student loans. Private student loans can also help cover the substantial price tag that comes with college, but this type of loan only makes sense in certain circumstances.
Explore the rates you could get on a private student loan here to learn more.
When it makes sense to apply for a private student loan
Here are a few scenarios in which taking out a private student loan may be a prudent financial decision.
When you've exhausted your federal student loan options
Federal student loans are usually the most favorable borrowing option due to their low interest rates, flexible repayment plans and unique borrower protections. However, there are annual and aggregate limits to how much you can borrow with these types of loans — and with the increasing costs of higher education, the limits are getting easier to hit.
If you've maximized your federal loan options for the academic year and still require additional funding, private student loans might be worth considering. If you have a good credit profile and income — or a cosigner with the same — you may be able to obtain a student loan with a rate and term that rivals what you can get with federal loans.
Don't wait for the new semester to start. Learn about your private student loan options right now.
When you don't qualify for federal student loans
Federal student loans don't require a credit check or a cosigner in most cases, making them accessible to a broad range of students. However, there are cases where you may be ineligible for federal loans due to specific circumstances, such as your immigration status or limitations due to your parents' incomes.
In these cases, private student loans could provide an avenue for financing your education.
After you've taken advantage of grants and scholarship opportunities
Grants and scholarships are essentially free money for your education, as they don't need to be repaid after you're done with school. If you've diligently pursued these funding opportunities — as well as your federal loan options — and still need more money to cover your college costs, applying for a private student loan might make sense.
By combining grants, scholarships and loans, you may be able to better manage your financial responsibilities without sacrificing your academic pursuits.
When you have a funding gap
Even with careful financial planning and various funding options, there may be a gap between your available resources and the cost of your education. In such situations, taking out a private student loan makes sense. That's because private student loans have much higher borrowing limits, allowing them to easily fill in the funding gaps.
As with any type of loan, though, it's essential to calculate the amount of the gap accurately and borrow only what you truly need to avoid unnecessary debt.
When you need to cover other college-related expenses
Tuition and fees are just a part of the cost of college. Other expenses, like textbooks, housing, meals, transportation and personal supplies can add up quickly. And, in many cases, grants and scholarships may only be available for tuition costs — and cannot be used to cover these extra expenses.
If your existing funding sources, including any income, savings, federal loans and parental support, are insufficient to cover the additional costs of your higher education, a private student loan could come in handy to ensure that you have the means to focus on your studies without financial stress. Find out more about the private student loan terms and rates you could qualify for now.
The bottom line
A private student loan can be a good option in certain cases, but should typically be considered only after you've exhausted your other funding options. When possible, it makes sense to opt for federal student loans before private ones due to their borrower protections and lower interest rates.
If you determine that a private student loan is necessary, make sure to compare terms, interest rates, and repayment plans among various lenders to secure the best deal possible. Your education is an investment in yourself, and with proper financial planning, you can pay for your education without compromising your long-term financial stability.
