Taking on student loan debt can be a good long-term investment for some professions, but not all student loan debt is the same. Students typically have two main options when it comes to borrowing money: a federal student loan or a university payment plan. What many have started to consider as a third option, is a private student loan from a bank or credit union. With the current student debt total at $1 trillion, it's a topic worth knowing a little bit about. If you're considering a private student loan, here are a few things you need to keep in mind. If you already have one, take a look at this list and make sure you know the terms of your agreement.

SEE: Student Loans: Private Loans

You're Going To Pay More In Interest Rates And Fees
A lot of private student loans market themselves as low-interest loans you can use for your education. The problem is that most of those advertised rates are only for people with impeccable credit scores. The majority of students who receive private loans don't get great interest rates because they don't know how to build a better credit score. In fact, less than 5% of borrowers receive the lowest rates for private student loans.

Those who do qualify for the lowest interest rate, and especially those who don't, should check the fine print to make sure they're not getting a variable interest rate that may increase in a few years. Many private student loans are set up with a variable interest rate that will increase over time, and you could end up spending a lot of money to pay for a small loan. Compared to federal student loan programs, which have fixed interest rates, you may end spending a lot more money than expected to pay back that private student loan.

SEE: 3 Easy Ways To Improve Your Credit Score

Can't Be Canceled or Forgiven
Unlike federal student loans, there aren't very many options for having your private student loans canceled or forgiven. For some federal student loans, if you work in the non-profit public service industry for 10 years you may qualify for federal student loan forgiveness. Not so for private student loans. Don't expect any options for private loans to be canceled or forgiven. And if you end up with a very big debt to pay, bankruptcy may have to be considered.

If You Lose Your Job, You May Be on Your Own
The current economic situation in the U.S. and throughout Europe is still unstable. People who lose their jobs, have lost their jobs or do not get jobs out of college, don't have as many options when it comes to repaying private student loans. Federal loans offer loan deferment for financial hardships, but you won't get the same options with a private student loan. You may be able to speak about the terms directly with the bank that owns your private student loan, but the bank is under no obligation to work with you to renegotiate or lower your monthly payments.

Income-Based Repayment Not an Option
Along the same lines of financial hardship, an income-based repayment (IBR) option is available for federal student loans, but not private loans. An IBR plan allows individuals to make monthly payments based on how much money he or she is currently earning. Each year, the IBR number is set based on your annual income from the previous year. The more you make, the more you'll pay, but after 25 years of payments, the loan is forgiven no matter how much is left. If you have a private student loan, you won't have access to this type of repayment plan.

SEE: Student Loan Changes You Need To Know

If You Have to Get a Student Loan, Look at Your Options
If you have no other option than to get a private student loan to pay for your education, consider applying for a loan from different companies and then compare their repayment plans. Often, it's difficult to know what interest rate you're going to get, what the fees will be and how your repayment is structured until you actually apply for the loan. By applying for several loans, you'll be able to compare rates and fees and make the best choice for you. However, know what credit inquiries can do to your credit score before applying to a high number of companies.

The Bottom Line
In most cases, private student loans aren't your best option, so make sure you know exactly what you're signing up for. Research each loan before you accept the terms. Your loan could be with you for a very long time, so don't jump into anything without knowing exactly how much it's going to cost and for how long.

Related Articles
  1. Personal Finance

    How To Get That Entry-Level Financial Analyst Job

    Landing a job as a financial analyst takes study, strategy and a lot of hard work. Here's how to hone your competitive edge.
  2. Personal Finance

    Does It Make Sense to Go to College in Europe?

    If you're deciding whether to get a degree abroad, first do your research and talk to alumni who have completed the same program.
  3. Savings

    6 Ways to Save Money on College Supplies

    Tuition and room and board are big expenses, yes, but the cost of textbooks and supplies can add up, too, unless you strategize.
  4. Professionals

    Is it Time to (Finally) Push Kids Out of the Nest?

    Parents should make sure their kids realize their home is a launching pad not a landing spot, and advisors can help clients talk to their children.
  5. Credit & Loans

    Four Ways to Improve Education In America

    U.S. students place 27th in math and 20th in science out of 34 countries. The United States must reform its education system or harm future economic productivity and global trade competitiveness.
  6. Savings

    A Look at the Cost and Tax Treatment of College

    Is there more we can do to improve the affordability of post-secondary education? We take a look at how students and colleges are taxed today.
  7. Credit & Loans

    10 Ways to Manage Student Loan Debt

    How to manage those pesky payments as you embark on adult life.
  8. Fundamental Analysis

    Student Loan Asset-Backed Securities: Safe or Subprime?

    Similar to the mortgage-backed securities that caused the 2008 recession, student loan asset-backed securities could lead to the next financial crisis.
  9. Professionals

    Scholar vs. Entrepreneur: What's Your Calling?

    You don't need a bachelor's degree to launch your own company. But which path — school or entrepreneurship — offers a better start to your work life?
  10. Credit & Loans

    The Lurking Dangers of Student Loans

    Student loans are popular, but they present many dangers.
RELATED TERMS
  1. Good Student Discount

    An auto insurance policy discount available to young drivers ...
  2. Whartonite

    A graduate of the Wharton School of Business at the University ...
  3. Free Application For Federal Student ...

    The form that must be completed in order to qualify for any type ...
  4. Student Debt

    Money owed on a loan taken out to pay for educational expenses. ...
  5. Student Loan Forgiveness

    Under certain circumstances, federally backed student loans – ...
  6. Direct Consolidation Loan

    A loan that combines two or more federal education loans into ...
RELATED FAQS
  1. Can I use my IRA to pay for my college loans?

    If you are older than 59.5 and have been contributing to your IRA for more than five years, you may withdraw funds to pay ... Read Full Answer >>
  2. Can my IRA be used for college tuition?

    You can use your IRA to pay for college tuition even before you reach retirement age. In fact, your retirement savings can ... Read Full Answer >>
  3. Can I use my 401(k) to pay for my college loans?

    If you are over 59.5, or separate from your plan-sponsoring employer after age 55, you are free to use your 401(k) to pay ... Read Full Answer >>
  4. What are the best MBA programs for corporate finance?

    Opinions vary based on which publications you consult, but the best MBA programs for a career in corporate finance are at ... Read Full Answer >>
  5. What are the long-term effects of delinquent accounts?

    Delinquency occurs when borrowers fail to make payments on their loans. All loan borrowers should do their best to avoid ... Read Full Answer >>
  6. What are the differences between delinquency and default?

    Delinquency and default are loan terms that describe failure to make a required payment. A loan in delinquency occurs the ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!