4 things to know before you sign up for a private student loan

In addition to choosing your major or whether to go Greek, you’ll have to figure out how to pay for four years of higher learning. Because the cost of college — from tuition and fees to room and board to pricey textbooks — can easily top $30,000 a year, it’s often hard for students and their parents to afford college on their own. That’s where student loans come in. 

There are two kinds of loans that students are usually offered as part of their financial aid package: federal and private. Federal loans are funded by the U.S. government; private loans are offered by financial institutions like SoFi and Sallie Mae and can include banks, credit unions, and sometimes, other stage agencies. “I always recommend that students borrow federal first before turning to private student loans,” says Mark Kantrowitz, a student loan expert and founder of  PrivateStudentsLoans.guru. (For their part, federal loans have more favorable repayment terms, loan forgiveness and other perks, compared to private loans.) But when federal loans are not enough, and you need a private loan, here are the key things to know. 

1. Shopping around for your private student loans can yield big savings

It’s essential to shop around for your private loan to get the best rate you can. Unlike federal loans, private loans may offer a variable rate. This may seem tempting because starting rates may be lower than fixed rates, said Kantrowitz. But they may start increasing over the term of the loan, which could increase the cost of that loan over time, and thus your monthly payment could increase. “The only time I would recommend a borrower getting a variable rate right now is if they are capable of repaying the loan and fully intend to do so before interest rates rise too much,” he said.  

2. Look for ways to save even more

Something as simple as putting your private loan payments on autopay can save you money over time. Most lenders will offer a slight interest rate reduction if you sign up for auto-pay or auto-debit, where your monthly payments are directly transferred from your bank account to the lender each month automatically. Lenders like Sallie Mae and CollegeAve are just a few that offer a 0.25% auto-pay interest rate reduction. 

“It reduces the likelihood that you’re going to be late with a payment. So they really like that, and that’s why you can get, depending on the lender, a quarter percent to half a percent interest rate reduction,” he says. “That’s for as long as you’re making the payments for auto-pay, and that can save you a little bit of money.”

Another way you can save money on both federal and private student loans is through the student loan interest deduction. You can deduct up to $2,500 in interest paid on all federal and most private student loans, during the previous year. And depending on your tax bracket, that could save you a few hundred dollars on your tax return.

3. Factor in fees to the cost

Fees can sneak up on you, and be costly. While many private loans roll their fees into their interest rates, late fees (on both federal and private loans) can add up. “When it comes to private loans, fees are basically a form of upfront interest that you’re paying no matter what,” said Kantrowitz. “But no matter how you slice it federal loans will most often have a lower cost to the borrower than the private loans.”  

4. These loans can (negatively) affect your parents’ financial future, so pay on time

When your mom or dad co-signs your loan, they’re on the hook for it. That means if you’re late with a payment or default on the loan, you won’t just wreck your credit, but also theirs. This can affect their ability to get other forms of debt, such as credit cards, auto loans, and mortgages because lenders are going to consider that co-signed loan as though it is the parents’ loan. 

More than 90% of undergraduate students and 75% of graduate students need a cosigner to qualify for a private student loan. “When it comes to a private loan, the student needs to be very responsible when managing it,” said Kantrowitz. “They need to take them seriously because they’re not just controlling their own financial future, but also their parents’.”