In the world of student loans, you basically have two options: Federal loans and private loans.
Most students borrow federal loans first–until they reach their maximum amount each year–and then rely on private student loans to make up any difference between the cost of college and the amount they can borrow from the feds.
These private loans generally don’t have a great reputation. Big lenders like Sallie Mae, Bank of America, and U.S. Bank have been maligned by borrowers in the past for offering high-interest rates and low-quality support and service on their student loans.
So, why on earth, then, would anyone ever consider refinancing their loans (federal and otherwise) through private lenders?
The truth is that although private lenders have not had the best reputation in the past, the industry is changing very quickly. And a number of new lenders are offering good service, great rates, and even more perks to borrowers who move their loans to a private lender.
There are pros and cons to the decision. It’s important for you to do your research and make the decision wisely.
1. Private lenders can offer lower rates
If you have federal loans, then your interest rate is determined by the year which you borrowed. While some graduates may have federal loans with ultra-low rates, many will have rates that come in above 5%.
Private lenders will have rates that fluctuate based on the market, meaning that if a borrower refinances at a time with low rates, they could score rates at 2% or more below what they are currently paying.
2. Private lenders base your rate on your credit
Federal loan rates are determined once per year and all borrowers receive the same rate–regardless of their credit history.
Private lenders will use a combination of traditional and new credit standards to determine the rate and repayment terms that you qualify for as an individual. Again, this can mean big savings for you as a borrower–especially if you have a strong credit history.
3. You may have more flexibility in your repayment terms
Repayment terms for federal student loans are fairly rigid. Most students borrow for 10 years, and they can qualify for longer financing depending on their total balance.
But, private lenders can offer extreme flexibility. Earnest, for example, allows borrowers to pinpoint their own monthly payment and then calculate their repayment term based on that number, meaning that they aren’t forced to choose between set loan lengths like 5, 10, or 15 years.
4. You won’t be able to qualify for forgiveness
One downside of refinancing your federal student loans through a private lender is that if you would have been eligible for full or partial loan forgiveness, you will be sacrificing that option.
Look into student loan forgiveness options before deciding. But, know that only a small percentage of borrowers can qualify for these programs.
5. You’ll give up forbearance but may still have some loan protections
Traditionally, one of the biggest drawbacks to refinancing through a private lender has been that borrowers sacrificed the peace of mind that comes with federal loan protections. These include the ability to qualify for deferment or forbearance on your loans during times of unemployment or economic hardship.
Thankfully, the trend is rapidly shifting.
Companies like LendKey, which finance your loans through not-for-profit credit unions and community banks, also offer unemployment protection for borrowers. In this case, you can halt payments for up to 18 months in periods of 6 months at a time.
6. You may be able to find a lender that services your loan for life
One of the biggest frustrations with student loans after graduation is when your debt is transferred from company to company.
Your payments may get lost, you may have to constantly update your online bill pay, and other frustrations come up when your debt changes hand. Unfortunately, it happens fairly frequently.
The company mentioned above, LendKey, promises to service your student loans for the entire life of the debt. So you won’t have to worry about chasing down whatever bank you owe money to this week.
7. Private lenders might offer extra perks
Aside from some of the basic protections, there aren’t many perks to having federal student loans.
While it may not be fun to have loans at all, many private lenders now offer substantial perks to borrowers, like career counseling, mentorship, and even sometimes invitations to exclusive events.
You probably shouldn’t choose your lender based strictly on the merits of what kind of swag they offer you–but, extra perks definitely don’t hurt!