The Truth About Private Loans: Top 4 Myths Debunked

Just like scary ghost stories are told around a campfire, private student loan myths are shared between students and soon-to-be borrowers. Instead of continuing to spread these rumors, let’s bust the top private loan myths right now.

Myth #1: Private Loans Are Always Worse than Federal Loans

A commonly touted reason for federal loans being superior to private loans is flexible repayment and forgiveness options. 

Reality: Federal student loans are regulated more stringently than private student loans and sometimes have more flexible benefits for repayment and forgiveness. But, borrowers have no control over their federal loan rates, which are set annually by Congress.

Even if someone believes they’re eligible for forgiveness, rejections are rising, and the processing time can be time-consuming. So, the payoff someone thinks they will have maybe, in fact, just be a myth about their student loan.

Private lenders can base interest rates on different factors other than the number set by Congress, which borrowers have at least some control over.

Advice: If you have good credit and a favorable debt-to-income ratio, you may qualify for lower interest rates than if you took out federal loans or private loans for college. Having a private loan with a cosigner might make you eligible for a better rate, whereas cosigners are typically not eligible for federal loans.

We always recommend applying for scholarships, grants, and federal aid first, then exploring private student loan options as a way to fill the gap if you are still short on funds to pay for college. But, by falling prey to this private student loan myth and ruling out private student loans entirely, you could miss out on funds to help you pay for college.

Myth #2: You Need Great Credit to Get a Private Student Loan

Most private lenders require credit checks to qualify students for a loan, which is a step that most federal loans don’t have. But does that mean that having good credit alone is enough to get you a private student loan? 

Reality: There’s often more to the eligibility process for private student loans than just good credit. Private lenders will at least consider a borrower’s debt-to-income ratio as well as your employment history. This means that a good credit score is only a piece of the puzzle.

Advice: Most students and cosigners need to document their sources of income compared to the debt they already have and their history of employment. Lenders use this information to offer interest rates under the borrowers’ unique circumstances.

There are additional circumstances for each loan type you should keep in mind. For example, when deciding your rate, the federal government doesn’t consider your debt-to-income ratio, earning potential, credit score, etc. Whether or not you are more likely to pay off your student loans in full and on time is not a part of the evaluation criteria for federal student aid. 

Meanwhile, many private lenders weigh the risk of the loan on a case-by-case basis, customizing interest rates and payment terms based on the likelihood of the student repaying the loan. So, if you believe private student loans are only for those with good credit, this student loan myth could get in the way of you getting the financing you need to achieve your goals. 

If you want to know if you qualify for a private loan without a cosigner or with a cosigner, check to see if your preferred lender allows you to pre-qualify to see your potential rates. Ascent allows our applicants to check if they pre-qualify in four easy steps without any fees or impact on their credit score.

Myth #3: Private Lenders Love to Sue Students Over Unpaid Student Loans

Millions of private student loan borrowers repay their loans without trouble, but that doesn’t make for an eye-catching story.

What does make for an interesting tale is the one student who faces an unbelievable consequence of nonpayment. 

These stories are scary. But they aren’t the reality for the majority of borrowers. 

Reality: Since these are the only tales we hear, this private loan myth gets repeated year after year—though it’s largely untrue. A lawsuit is time-consuming and costly. Lenders don’t want to deal with this any more than you do, so it’s usually not their first, second, or third recourse.

There’s also often more to a case than nonpayment to force a lender to sue. 

When you hear about a borrower being sued for missing payments, you should know this situation is possible, but by far not the norm – for both private and federal student loan borrowers. (Yes, that’s another student loan myth we need to debunk: You CAN be sued by the federal government for nonpayment! But, like private loans, this is uncommon.)

Advice: The best piece of advice is to pay your loans on time. Making payments on time for your student loans is an essential part of your financial wellness journey and will help set you up for future success in college and after graduation. 

If you’re still struggling to make your payments work within your budget, talk to your lender to find a solution that fits your loan terms.

In the rare case a lawsuit does come up, chances are you’ll find yourself fighting a credit agency, not your lender. Be sure you know your rights, do your research, and choose your next steps accordingly. 

And in case you’re worried: You can’t be arrested or jailed for not paying your student loan debts. However, you can get arrested for not showing up to court if you’re sued, so don’t ignore a lawsuit in the case that one does come up. 

Myth #4: You Can’t Get Out of Default

A loan default occurs when your loan is sent to a collections agency because you haven’t made payments for a certain amount of time. Generally, private loans default when you miss three monthly payments in a row. You can also default on your private student loan if you default on an unrelated loan or declare bankruptcy.

So, what do you do if you have defaulted on a private student loan?

Reality: As mentioned, federal loans are regulated. This includes how a federal student loan borrower can get their loans out of default. Private loans don’t necessarily follow the same guidelines, but borrowers can work with their lenders to get the loans back on track. 

Advice: If you think you’re going to be unable to pay back your student loan, contact your lender as soon as possible. Don’t wait until after you’ve missed a payment or, worse until the loan has already defaulted. It’s in everyone’s best interest to get the loans in good standing and back into repayment, so many lenders will work with you to set up a repayment plan.

If it’s already too late and you have defaulted, you should contact your lender before talking to the creditor. Some lenders have a “rehabilitation” option that allows you to make a fixed amount of good faith payments to show you are making progress toward repayment. Unlike federal programs, private lenders are not obligated to provide rehabilitation assistance, so contact your lender or review your loan terms to see if this might be an option for you.

Conclusion: Putting Out the Student Loan Myth Campfire

While those campfire stories may have been believable at night, they seemed way less scary in the light. Don’t believe all those BoogeyMan-like myths about student loans, either. As we have reviewed here:

• After exhausting alternative options, private student loans can be a good option for students to close a funding gap. 
• You don’t need a perfect credit score to get a private student loan.
• Lenders aren’t eagerly waiting for opportunities to sue delinquent student borrowers and may be more willing to work with you than you think.
• You might be able to get out of student loan default, depending on your lender and your circumstances.

In most cases, the best defense against student loan myths is a good offense. So, be upfront with your lender about your financial needs, credit, and any struggles that arise during repayment.

Ascent is invested in your financial wellness during college and beyond, which is just one of the reasons we provide financial wellness courses as a part of our loan application process. You can explore more helpful tips on our blog, review our checklist to pay for college, or contact us directly about our student loan options.