7 Private Student Loan Myths Busted

Private Student Loans: Myth vs. Reality

Updated on December 10, 2024

Private student loans often grab attention in discussions about college debt. You’ve probably heard stories about borrowers drowning in debt with no way out. While these cases can happen, they’re not as common as they may seem. Unfortunately, these stories have caused a lot of confusion and myths about private loans. This article is here to clear things up, giving you the facts you need to make smart choices about paying for college.

Myth #1: When you take out a private student loan, you pay lots of extra fees.

Fact: Most private student lenders offer loans with no application, origination, or disbursement fees.

Myth #2: The interest rates on private student loans are significantly higher than other types of loans, and the rates go up fast.

Fact: Like other credit-based loans, the interest rates on private loans are determined by the credit-worthiness of the borrower and the cosigner. Borrowers and cosigners with the best credit get the best interest rates. Variable-rate loans are calculated by taking a variable index rate (usually the LIBOR or WSJ Prime) and adding a margin. Most of the largest lenders also offer a fixed-rate borrowing option.

Recent trends (available on BankRate.com) show the relative stability of the LIBOR and WSJ Prime rates. Huge upward or downward swings are rare. Longer-term, the interest rates may increase.

Myth #3: If you die, your cosigner will be stuck with the loan.

Fact: Most of the largest lenders will forgive the balance on a private student loan if the student borrower dies or becomes totally and permanently disabled. Other lenders offer a compassionate review process where unusual circumstances are reviewed on a case-by-case basis.

Myth #4: The interest rates on private student loans are always variable, so you never know what your payments could be down the road.

Fact: Many lenders offer both fixed and variable rate options on private loans. You can often choose the option that best fits your risk tolerance.

Myth #5: You can’t suspend payments on private student loans.

Fact: While private student loans don’t offer the same deferment and forbearance benefits as federal student loans, most lenders offer programs for delaying repayment in certain circumstances, such as economic hardship and medical/maternity leave. Partial forbearances with interest-only payments may also be available.

Myth #6: You don’t have flexible repayment options for private student loans.

Fact: Many private student loan lenders offer several repayment plans to choose from. You may also be able to obtain extended repayment, graduated repayment, or a period of interest-only payments.

Myth #7: Your private student loan cosigner is equally responsible for the loan until it is paid off.

Fact: Many lenders offer cosigner release programs that enable the cosigner to drop off the loan after the student borrower makes a specified number of consecutive on-time payments and meets credit criteria. However, borrowers often report difficulty in qualifying for cosigner release.

If you think you need to borrow to pay for college, borrow smart. First, look for money that doesn’t have to be repaid, like grants and scholarships. Then, consider federal student loans, and finally, private loans.

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