The Downside of Unsubsidized Private Student Loans

Unsubsidized private student loans will ultimately cost more than subsidized options. You will also need to begin paying these loans off earlier than subsidized loans, which tend to have long grace periods. Most subsidized loans come from government lenders. If you are shopping for private loans, you are likely to only have unsubsidized options.

Higher Interest Rates

The main issue with a number of private student loan options is high interest rates. Student borrowers have low to no income, short credit histories and a low asset base. These factors combined make them high risk borrowers. When high risk borrowers apply for loans, they will get much higher interest rate quotes from banks and alternative lenders. These high interest rates will help the lender protect them against a degree of risk; the high rates also compensate the lender for taking on more risk in the loan.

No Grace Period

Subsidized loans typically have at least a pre-graduation grace period. This means no payments are due, and interest may not even accrue, during the time you are still a full-time student. In some cases, the grace period will even extend beyond graduation for 3-12 months. This allows a student to secure an income before beginning to make loan payments. Without a grace period, a student will have to make payments on loans while attending school. You may have to work part-time while you attend school to do so. Thankfully, some colleges and universities allow for work-study programs to ease this burden. You will be able to find on campus employment to make your loan burden smaller even when you attend college.

Higher Loan Standards

Subsidized loans are typically need based. A lender will evaluate a potential borrower based on his or her ability to pay and then extend the loan if the student has a lower ability to pay, which is contrary to most lending practices. This is put in place to help economically disadvantaged persons achieve their higher education goals. When you are not eligible for this need-based option, you will have to qualify on the exact opposite side of the spectrum. You will need to have a good credit history and solid asset base. This is not possible for a number of students who will then have to seek cosigners on their loans. Ultimately, the students stuck in the middle suffer the most. They are not needy enough for a subsidized loan but cannot totally afford an unsubsidized option.

Less Modification Options

While private loans are flexible in most respects, there are some areas where they are less flexible than public options. Private lenders will be less likely to defer payments on an unsubsidized loan if you cannot locate employment after graduation. Since there is no grace period on most unsubsidized loans, this means you will face large monthly fees even if you do not have a job yet. You can apply for deferment with most student loans. However, you will only be eligible if you have made your payments up to this point and have an immediate financial emergency.


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