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.

1. 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.
2. 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 graduation.
3. 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.
4. 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.
5. 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.
6. 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 the loan.
7. 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.
8. 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.
9. 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.
10. 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."