Sign reading student loans next to a graduation cap filled with loose change

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Most students need to take out student loans. But not all student loans are created equal.

Federal student loans, offered by the Department of Education, have great benefits. These loans have low, fixed interest rates. Some have subsidized interest. And borrowers have plenty of repayment flexibility.

Private loans don’t offer these benefits -- so are they inherently worse for students?

Taking out private student loans isn’t necessarily a bad thing. It may be necessary with the caps on federal student loans you can take out. But before you decide to borrow from a private lender, you need to understand the details of private student loans.

Here's the good, the bad, and the ugly.

What’s good about private student loans?

Private student loans let you borrow for school when you otherwise might not be able to afford it.

Have you exceeded your federal student loan allowance? Exhausted options for scholarships? Used all of your savings? If you have, you'll need to find another way to pay for your degree. Private student loans generally have lower interest rates than credit cards, so they're a more affordable way to fund your education.

Private loans also offer more flexible options for payments while in school than traditional personal loans. Many -- but not all -- private lenders allow you to defer payments for a few months after graduation. You might also be able to temporarily pause your payment if you face financial hardship. Some private lenders even offer help finding a job if you’re struggling to pay.

Private loans can also be refinanced with private refinance lenders if you have reasonable credit and enough income. So it's possible to reduce your interest rate and consolidate your private student loan debt after graduation.

What’s bad about private student loans?

There are also some downsides to private student loans that you need to think about.

For one thing, they don’t offer the borrower protections that federal student loans do. Private loans

  • are less flexible,
  • usually have higher interest rates,
  • have limited forbearance options,
  • don't allow you to change your payment plan as easily,
  • don't offer a payment plan with payments capped based on income, and
  • don't provide a path to loan forgiveness -- even for public service work.

Interest rates can vary a lot by lender too, so you’ll need to shop around.

When you take out private student loans, you need reasonable credit and proof of income. If you don’t have it, you’ll need a cosigner willing to share legal responsibility for your debt. This can make it difficult for many young people to get approved for the financing they need, especially if their parents don’t have perfect credit or a lot of money.

You can mitigate some of the downsides of private student loans. For example, you can shop for an affordable rate. Make sure you understand loan terms. Don't borrow more than you can pay back. And, after you've graduated, refinance high interest rates.

But some of those downsides are inherent in private loans -- such as the difficulty in qualifying without proof of income -- and you’ll just have to live with it.

What’s ugly about private student loans?

Now for the ugly. Many private lenders allow you to borrow tons of money when you’re still young. The limits imposed by private lenders are often well above the amount the Department of Education will lend you. You could find yourself drowning in debt before you understand the consequences of your actions.

It’s also hard to get private student loans discharged in bankruptcy. You basically have to pass a difficult test showing that paying back your loans will always be an undue burden. There’s a very real chance you could have tons of debt with no way to pay it back or get rid of it -- unless you find a job that pays enough.

While this is true for federal student loans, they have more options for those who are struggling. Income-based payment plans help in a way that private student loans don’t offer.

Should you take out private student loans for school?

Taking out private student loans may be a necessary evil if you have to borrow money for your education and can’t get any more federal loans. But be sure to think carefully about whether you can pay back what you borrow. And about how repaying your loans will affect other financial goals.

You should always borrow the minimum possible, only borrow what you can afford, and make sure you shop around to find the best terms. If you do this, paying back your debt shouldn't be a huge hardship after graduation.