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The Impact of Private Loans on Choice of Repayment Strategy

A recent health sciences graduate created a repayment strategy that included making payments on his federal loans to help him qualify for the Public Service Loan Forgiveness program.  He qualified for payments under the new Income Based Repayment plan and was starting employment in a public service position. He seemed all set.

When he looked at the amount he had set aside each month for his student loan payments, however, he realized he had forgotten to include payments coming due on private loans he had borrowed not only in college, but also during his post-baccalaureate year prior to professional school.

His repayment strategy was derailed, and he was understandably upset: Choices he had made earlier relying on private loan borrowing were now coming back to haunt him. 

Federal Loans or Private Loans?

You have seen continual references to responsible borrowing on this site, with admonitions to budget wisely, spend accordingly, and control what you can within the confines of your student financial aid budget. You plan to do just that, yet you still face the hard reality that you need to borrow for school, and you may have to borrow a lot.

You see and hear what seem like horror stories about students borrowing too much, especially with private loan programs.  You see constant references to exhausting federal eligibility first before taking out private loans for school.  You hear examples like the one above and you commit that this will never ever happen to you … and then reality sets in.

Perhaps you are an undergraduate or certificate program student, and you feel like your hand is forced when it comes to private borrowing.  After all, federal student loans have relatively low borrowing limits. You may also be facing a decision about private loan borrowing as a graduate and professional student because, even though you can borrow up to your entire cost of attendance through Federal Stafford and Federal Grad PLUS Loans, these loans carry interest rates of 6.8% and 7.9% respectively, and you are intrigued when you hear private lenders offering what seem like substantially lower rates on their private student loans.

Responsible Borrowing Means Responsible Choices

Regardless of your certificate or degree program and field of study, ask yourself these questions before you apply for a private loan:

  1. Have I exhausted not only my federal loan eligibility, but also other options, such as grants, scholarships, fellowships, and other sources of potential aid that I do not have to repay?
  2. When will this loan come due and when it does, what are my repayment options?  How do these compare with my repayment options on federal loans?
  3. Can I postpone payment on this loan if I pursue additional study, and if so, for how long?  Are there fees for doing so? Knowing the rules about postponementis extremely important for programs, such as dentistry and medicine, that offer or require residency programs.
  4. Can I lower the cost of this loan if I find a creditworthy cosigner? Do I want to saddle a potential cosigner with this credit obligation?
  5. Perhaps the most important question to ask involves not only the interest rate, but also the frequency at which the accrued, unpaid interest will be added back to the loan’s principal.  This process, called “capitalization,” remains—without question—the number one reason some students face enormous balances on private student loans when they enter repayment. 

Don’t let a poorly planned or uninformed choice about private loans now derail your choice of repayment strategy later.

For additional information on the Public Service Loan Repayment Program and Income Based Repayment, please visit:

Paul S. Garrard, American Dental Education Association Financial Aid Consultant and a 31-year veteran of student financial aid and higher education, wrote this article.