In this article we examine repayment options for private student loans.
Before going down the private loan route there are a number of important factors to consider. Terms vary widely between plans and it’s important to be aware of the key differences.
Fixed rate vs. variable rate loans
Fixed rate student loans have a rate that stays the same throughout the life of the loan. Variable rate loans, on the other hand, are pegged to a market index rate that will fluctuate based on the US economy and interest rate changes.
If you know that you will be able to pay off your student loan relatively quickly then a variable rate loan can be a good cost-saving option. The longer it takes you to pay off the loan the more opportunity there is for interest rates to rise, increasing the interest you will be paying on your loan; you’re exposing yourself to the ups and downs of the US economy.
Given the current climate of extremely low interest rates a fixed rate loan might be the better option for borrowers who know they are likely to take longer to pay off their loans – interest rates are unlikely to stay as low as they are now so the opportunity to lock them in at favorable rates can be attractive.
Shorter term vs. longer term
A shorter term repayment plan will likely save you more in total interest over the life of the loan than longer term plans which typically have higher interest rates. Shorter term repayment plans will require higher monthly payments. Therefore, while shorter term plans can be a good cost-saving option as you’ll be out of debt much sooner you should only select this option if you can comfortably afford the higher monthly payments.
Most private lenders offer different repayment length options. These can vary from 5, 10, 15 to 20 years. Some lenders offer 10-year hybrid plans, in which you pay a fixed rate for the first 5 years and then switch to a variable rate for the last 5 years.
Private student loan forgiveness
Unlike with federal plans, loan forgiveness does not currently exist for private repayment plans.
Many private lenders will not provide longer term deferment options. If they are available they are likely to come with very specific requirements (eg. you are on active military duty). As you’ll see below, some plans offer short term deferment.
Limited forbearance options
Many private lenders either do not offer forbearance options at all or if they are available they are generally limited compared to federal plans. Any available forbearance is likely to be short term relief only (2-3 months) as private lenders are not required to offer such benefits.
Lack of flexible repayment options
Private loans don’t have the same range of flexible repayment options offered by federal programs (eg. Income-driven plans).
You can refinance your private student loans to extend your loan term and possibly qualify for a lower interest rate.
The application process for private repayment options is not a uniform and varies by plan. Although the application process itself is often less burdensome than for federal plans, there are often additional requirements that can be challenging for borrowers. For example, most private lenders will require a co-signer on the loan as well as the borrower’s credit score.
There are also likely to be specific eligibility requirements around level of study (undergraduate vs. graduate) and type of school.
Comparing plan types
Private lenders may offer several plans to choose from. In the table below we discuss some of the key differences between the main types of plan.
|Immediate repayment||Monthly principal and interest payments begin immediately after you receive the loan.||You save money on interest and your loan will be paid off more quickly.||As you’ll have to start making repayments during college this can put a lot of pressure on your finances at a time when you are unlikely to be earning.|
|Interest-only||You make interest-only payments while you are in college, and start making principal and interest payments after you leave college.||You save money on interest because the interest won’t be accruing while you are in college.||Even if smaller than the Immediate repayment plans, under this option you still have to make payments while at college.|
|Fixed||You make lower fixed monthly payments while you are in college, and start making regular principal and interest payments after you leave college.||The monthly payments are more affordable than full interest payments.||You still have to make payments while at college.|
|Full deferment||You start making payments typically six months after you leave college.||You don’t have to worry about making payments while you are in college and are not earning.||Interest continues to accrue during the deferment period and will be added to your loan balance when you start making payments.|