13 Myths Busted About Private Student Loans

Written by: Reyna Gobel
Updated: 3/31/21

Private student loans are becoming a cost effective option for families to borrow to pay for college. Interest rates are often lower than parent and graduate student PLUS loans, they don’t have an initial fee to borrow the money, and companies are coming out with new incentives to entice borrowers that federal student loans don’t have.

However, there are still quite a few myths about private student loans that are mainly based on private student loan practices from over a decade ago.

We busted the top 13 myths below.

1. Myth: Private student loans are always more expensive than federal student loans.

Federal student loans issued directly to undergraduate students are generally the best loans all around. The interest rate is low and students are offered federal student loan protections including a wide variety of repayment plans, guaranteed breaks from making payments when needed, and the potential for some loan forgiveness based on either public service or income.

However, loans to parents and PLUS loans for graduate students have higher initial rates to borrow the money and could have higher interest rates than a private student loan, too. Even unsubsidized loans to graduate student loans can have higher rates.

2. Myth: Borrowing limits are too high.

Borrowing limits for private loans may be lower than parent PLUS loans. PLUS loans base loan amounts on the full cost of attendance minus other financial aid received. Thus, if there was $25,000 per year left to pay for after scholarships, grants, and loans directly to students, a parent could be approved for $100,000 or more over the course of an undergraduate degree. The amount approved for borrowing doesn’t change whether the parent makes $40,000 or $400,000. Affordability isn’t considered for loan approval.

Private loans do consider income. Sometimes the result is a smaller amount of money approved, potentially a student needing to switch to a cheaper school, and an affordable amount of debt borrowed.

3. Myth: Your interest rate could change.

Some private loans are issued with variable interest rates, interest rates that can rise or fall over the life of the loan based on market rates for consumer loans. These loans may be a good idea if you plan on paying off the loan very quickly, such as within a year or two. The reason why is they may be issued at a slightly lower initial rate, but the potential interest rate changes make them a bit riskier.

However, most private student loans are now issued with a fixed interest rated. The rate and monthly payments will likely stay the same for the entire length of the loan.

4. Myth: There is no option for breaks from repayment.

It’s quite common for private student loans to give up to 24 month of breaks from payments. When deciding among private loans, find out how much time you’ll have away from payments if you hit an economic snag. You’ll also want to know if approval is automatic or a specific circumstance is needed such as unemployment.

Don’t forget to ask about the cosigner factor. Some lenders may not give you a break from payments if the cosigner could afford the monthly payments based on their income. This is partly why the terms for cosigner release after proving your own credit and income post graduation is important.

Note: Never be afraid to ask for a break from payments or a temporary payment amount reduction. Lenders generally prefer to work with you

5. Myth: They cost the same to borrow as federal student loans.

Private student loans don’t have origination fees, fees to borrow the money that is charged the moment you take the money out. Origination fees on federal student loans are currently 1.059 percent if borrowed by 10/1/20 for unsubsidized and unsubsidized loans directly to students. PLUS loans to graduate students or parents have a 4.24 percent origination fee. 4.24 percent can easily equal a year’s worth of interest on a private student loan.

6. Myth: They have no real perks.

Private loans may not offer loan forgiveness, but they can have cool perks that federal student loans don’t offer such as airline miles as sign up bonuses, help in getting a new job, and happy hours. Check with your potential servicer to see what perks are offered.

Always remember the most important perks will be cosigner release and availability to take a break from payments when you need to for economic reasons.

7. Myth: Co-signers are stuck with the loan forever.

If you get an endorser on a federal PLUS loan for parents or graduate students, the endorser is on the loan until it’s completely repaid. However, private loan lenders may offer a Co-signer release option where the co-signer is released after a specific number of payments, ranging from 12 to 24 months. The release generally requires proving you have the income and credit rating that supports you can continue making payments on your own.

8. Myth: A cosigner is always required.

Especially if you’ve been in the workforce for a while and have a chance to build your own credit, it is possible to qualify for private student loans with your own credit and current income. Plus, you can try again the following semester if you need time to rebuild your credit.

Upping your chance for loan approval and for co-signer release in the future are just a couple of the reasons to work on building a good credit score. Experian, one of the three major credit bureaus, offers a free score, a copy of your credit report, and advice on how to improve your score.

9. Myth: Your other financial aid doesn’t reduce your borrowing limit.

Just like with federal student loans, private student loans are designed to cover the cost of attending the college you selected. Thus, you likely won’t be able to borrow much more than what your college states as the full cost of attendance, which takes into account everything from tuition to living expenses on and off campus.

For example, the cost of attendance at the school you choose is $25,000. You received $5,000 in scholarships and aren’t borrowing federal student loans. Depending on income and credit score, you could get approved for up to a $20,000 loan.

10. Myth: You have to borrow the full amount offered.

You can always reject part of the student loan amount you are offered. However, make sure you are rejecting dollars you know without a doubt you won’t need. For instance, you plan on getting a part-time job while in college. It took a month longer to get the job than expected. You may not have access to excess funds you didn’t borrow. You can always pay the loan off early without penalty or save the excess as an emergency fund and borrow less in the future.

11. Myth: Parents PLUS loans are better loans.

Parent PLUS loans are better if you need 30 years to pay off the loan, qualify for income-contingent payments, or can’t qualify for private loans due to your credit rating. However, the interest rates may be higher than private student loans and parents can’t remove their name from the loan under any circumstance.

12. Myth: Refinancing is just for those with high-earning degrees.

Refinancing is a private student loan option for combining all your private student loans, federal student loans, or a combination of both into one loan. As with any option that includes private student loans, all options are from private lenders and not from the federal government. Some private lenders may offer special deals in both private student loans and refinancing for students from high-earning majors. However, this isn’t the case for many student loan refinancing options.

For federal student loans you can consolidate your student loans into one loan, but it won’t reduce your interest rate.

Note: Avoid refinancing your federal student loans if you are on the path to receive Public Service Loan Forgiveness after 10 years of on-time payments of public service work.

13. Myth: There are no options for lower payments

You won’t likely get the 30-year repayment plans that you would with federal student loans, but you can choose among payment plans with a wide variety of time frames for repayment that can stretch out repayment.

Bottom line: Unsubsidized and subsidized student loans issued directly to undergraduate students are the best loans to borrow in most cases. However, for additional funding for an undergraduate education or for graduate students and beyond, it’s best to compare all borrowing options based on the federal protections or interest rates and private loan perks that work best for your individual situation.