Private Student Loans: Risks, Costs, and Safer Alternatives for Families

Why Families Turn to Private Student Loans

Spring brings college acceptance letters, but for many families, the joy is mixed with panic over tuition costs. While options like filing the Free Application for Federal Student Aid (FAFSA), applying for scholarships, and comparing college offers can help, some students face a funding gap between federal aid and total attendance costs.

When families cannot cover the difference out of pocket, just over 9% of students turn to private student loans. Among undergraduate borrowers, 92.45% of private loans are cosigned—often by a parent. However, cosigning a private student loan can put your credit score, retirement savings, and even your relationship with your child at risk.

Student Loan Debt: Federal vs. Private

Federal Student Loans: The Majority of Borrower Debt

There are 42.8 million federal student loan borrowers, holding a total balance of $1.693 trillion, which accounts for 90.9% of all student loan debt. Federal loans do not require credit or income checks, and interest rates are set by Congress, ensuring consistency for all borrowers. Additional benefits include:

• Income-driven repayment plans
• Potential loan forgiveness programs
• Forbearance and deferment options

Despite these protections, 10.3% of student borrowers default within three years, and an average of 6.24% of student loan debt is in default at any time. While the exact breakdown of federal vs. private defaults is unclear, private loans—especially cosigned ones—are not immune to default risks.

Private Student Loans: A Smaller but Riskier Share

Private student loans make up only 9.13% of all student loan debt, totaling $133.4 billion. Unlike federal loans, private loans require credit checks and income verification, and interest rates vary by lender. They also lack federal protections like income-driven repayment or loan forgiveness.

Parent PLUS Loans vs. Private Student Loans: Key Differences

Parent PLUS Loans: Federal Option with Limitations

If federal aid, scholarships, grants, and work-study programs do not cover the full cost, a Parent PLUS loan may be an option. This federal loan allows a parent of a dependent undergraduate to borrow up to the cost of attendance, minus any other federal aid received. Key features include:

• Multiple repayment options
• Deferment and forbearance availability
• No path to loan forgiveness
• Non-transferable to the student

While Parent PLUS loans offer some flexibility, they come with higher interest rates than direct federal loans for students and require a credit check. Parents are solely responsible for repayment, which can impact their financial future.

Private Student Loans: Higher Risk, Less Protection

Private student loans are typically more expensive and riskier than federal options. Lenders set interest rates based on creditworthiness, and these loans often lack flexible repayment plans or forgiveness programs. Additionally, cosigning a private loan means the parent’s credit score is on the line—missed payments can damage both the parent’s and student’s credit.

"Cosigning your child’s private student loan can put your credit score, your retirement, and even your relationship with your child at risk."

Safer Alternatives to Private Student Loans

Before considering private loans, explore these options to minimize debt:

• Maximize federal aid: File the FAFSA early to qualify for grants, scholarships, and federal loans with better terms.
• Research institutional aid: Some colleges offer additional grants or scholarships based on merit or need.
• Consider community college or in-state schools: Starting at a lower-cost institution can reduce overall borrowing.
• Explore work-study programs: Part-time jobs through federal work-study can help cover expenses without loans.
• Negotiate tuition costs: Some schools may adjust aid packages if you demonstrate financial need.

Key Takeaways for Families

Private student loans should be a last resort due to their higher costs and lack of protections. If borrowing is unavoidable, exhaust all federal options first, including Parent PLUS loans, which, while not ideal, offer more stability than private loans. For parents, cosigning is a high-stakes decision—weigh the risks carefully and discuss repayment plans openly with your child.