Kids make college savings jars at Sammy Rabbit live event

Is it possible for the average American high school student to attend college without a loan? Yes. It is possible. However, it is not probable. According to the site StudentLoanHero.com, seven out of 10 students graduating from four-year colleges carry student loan debt with them into young adulthood.

Did you know that the average 2016 college graduate finished school more than $37,000 in debt?

While many students look to federal loans to help fund their higher education, approximately 20 percent of students receive loans from private lenders. Private loans often make up the difference between what is needed and what is available in grants or scholarships.

Do your due diligence if you determine you require private loans to attend and graduate from college. Do not just rush out and get a private loan and the payments that come with it. Shop around. And be sure to consider and fully understand the following three points:

1. Private Loans Don’t Come with Federal Perks

When you take out federal student loans, they come with a host of benefits should you need them. They are available during the life of the loan. For instance, if you hit hard times and need a break from making payments until you are back on your feet, you can get a forbearance. If you continue your education and enter another degree program, your payments can be deferred until six months after you’re finished—and hopefully employed. Depending on your chosen field, some or all of your loan balance might be forgiven.

Most of those benefits are not available with privately financed loans. Private lenders sometimes offer an “interest-only” payment plan during school, but for the most part, once you take out a private loan, you will start making payments immediately—whether you are in school or not.

There also are no income-based repayment plans, or options for forgiveness. Taking out a private student loan is a lot like taking out an unsecured personal loan—payments start right away and do not stop until they are paid completely.

2. Private Loans Have Higher Interest Rates

If you are hoping to get a low interest rate on your private loan, you will probably be disappointed. Private lenders are free to set whatever interest rates they like, whereas the federal government tends to provide loans at more affordable interest rates. As a result, those who take out a private loan typically pay more in interest than those who take out a federal loan for a similar amount.

The average federal loan for instance, could carry an interest rate of six percent or lower. Interest accruing on the loan is paid by the federal government while the borrower is in school. Not only does a private loan carry a higher interest rate, interest payments are the responsibility of the borrower while he or she is in school.

Additionally, you will be sorely disappointed if you are hoping for a tax break from all the interest you will pay on your private loan.

3. Private Loans Require Good Credit—and Maybe a Cosigner Too

With the exception of a PLUS loan, the federal government does not take a borrower’s credit into account for most loans it offers, private lenders almost always do. Some lenders have a minimum credit rating—usually around 620-650. Borrowers who come in on the lower end of the allowable credit spectrum often are given higher interest rates than those with excellent credit ratings.

If you have had credit issues in the past—or if you do not have any credit at all—you probably will need a cosigner for approval of a private loan. Getting a private loan might be completely out of reach for borrowers who cannot find a cosigner.

Online private lenders often can do a “soft” credit pull that does not affect your credit report at first. This means you can do some shopping around for the best deal before committing to a lender and having a hard inquiry on your report.

Conclusion

Private loans can be a fantastic help to students who find that their financial aid package does not fully meet the cost of their education. Be sure to do your homework before signing on the dotted line. Compare and contrast loan options. Weigh your alternatives. Ask questions. Talk to counselors and loan experts. Take the time you need to fully understand exactly what you are agreeing to and signing. You might be making your life more difficult than it has to be if you are not thorough.