Why You Should Stick With Federal Student Loans

Editor's note: This article originally appeared in the November 2014 issue of Kiplinger's Personal Finance.

Private student loans, offered by banks and other lenders, have fixed rates as low as 4% for borrowers with good credit; variable rates on some private loans are as low as 2.25%. But private loans lack many of the protections that come with federal loans—one big reason your student should stick with federal loans. For instance, in most cases, a student won’t qualify for a private loan unless the parent cosigns, says Kalman Chany, author of Paying for College Without Going Broke (Princeton Review). And once you’ve cosigned for a loan, you’re on the hook for payments if your child defaults. Plus, private loans aren’t necessarily discharged if the borrower dies or is disabled. If you cosigned the note, you’ll be the one repaying it.

Many private loan contracts give lenders the option to put the loan in default and demand repayment of the entire balance if the cosigner dies or files for bankruptcy, according to the Consumer Financial Protection Bureau. In fact, even a few late payments could put the loan into default.

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Private loans do have one advantage over federal loans: Some will cover costs that don’t qualify for federal student loans. Gary Carpenter, a certified college planner in Syracuse, N.Y., says he has clients who were recently approved for a PLUS loan for their child’s college costs, but the loan wouldn’t cover a summer school course their child needed to take because it was for less than six credit hours. The parents, who have good credit, paid for the course with a $5,500 private student loan.

When it comes time to repay private loans, relief is at the discretion of the lender. Lenders aren’t required to provide deferment for borrowers who are unemployed or experiencing economic travails. However, many private lenders offer short-term relief, such as interest-only payments. Some also offer forbearance; interest will accrue while you’re not making payments, increasing the amount you owe.

It’s nearly impossible to have private student loans discharged in bankruptcy. Read the terms of the promissory note for information about repayment options, and talk to the lender. You can find more information about private loans at Student Loan Borrower Assistance, a nonprofit advocacy group, at www.studentloanborrowerassistance.org.