There was a time when it was very easy for me to convince people of the danger of private student loans. I would tell families that private student loans almost always require co-signers and usually that was enough to scare them away. If that didn’t work, I could point out that private student loans are variable loans so you don’t know exactly how much you are going to be paying. Usually this was all people needed to hear, but for those who still were not deterred, all I had to do was say that private student loans are not discharged even by the death of the student. As a co-signer, you will be culpable for the balance of the loan, even if you are mourning the premature death of your 20-year-old child.

Well, many of those deterrents to private student loans are no longer in effect as private student lenders heard those complaints and made adjustments. The co-signer is still almost always required, unless a student has established an unprecedented level of quality credit, and that is rare for a teen or young 20-something. Private student loans now offer fixed rates so the variable rate argument is no longer applicable. About five years ago, private student loans from the better lenders did away with their previous policy of not discharging loans after death. Argument number two just got extirpated.

I used to point out that private student loans could not be deferred like federal student loans and now even that is no longer true. Another argument against private student loans was that if you ran into a tough time, they offered virtually no flexibility, but now many of them will offer forbearance options for up until a year.

If this isn’t enough, while federal loans have origination fees, private student loans generally do not. Some private loans even offer superior rates for students who have excellent grades, something akin to the good student driver discounts that insurance companies offer.

Well, if all this is true, why do I remain so cynical about private student loans? Here are six reasons that I still rarely recommend a student take out a private student loan:

1. Federal direct student loans are vastly superior loans. They offer substantially better rates, the potential for the government subsidizing the interest, better repayment options, and no credit check or co-signer is required. If an undergraduate dependent student can already borrow $27,000-$31,000 for their undergraduate studies (the federal maximum for undergraduates), most student do not need to borrow more than this. This is already going to lead a student to have to pay approximately $300-330 a month for ten years, so borrowing more than that for most students is irresponsible and unadvisable.
2. Private student loans do not offer the potential for loan forgiveness.
3. Private student loans have nowhere near the flexibility in repayment options that federal loans have.
4. Private student lenders frequently have deceitful literature. The more honest ones will tell you that there is no way you should select a private loan over a federal direct loan when you talk with them, but when you read their literature, it is a lot more nuanced and subtle.
5. Private student loans like to compare their loans to the Parent PLUS loans but what they don’t often tell you is that the Parent PLUS loans offer much more flexibility with their repayment options. They also never mention that Parent PLUS loans can be converted to consolidated loans and, through the income contingent repayment, they have at least the potential to qualify for public service loan forgiveness (PSLF).
6. A lot of private lenders use teaser rates to draw students and parents in but usually those rates are only good when a co-signer is in the top three percent of the nation in terms of their credit score.

Are there rare instances when private loans make sense? I can’t deny that, but it is rarely advisable. Have private student loans improved? Yes, I cannot debunk that either, but don’t ever forget the recent headline from a CNN/Money article, “Wells Fargo says it faces a one-billion fine over its loan scandals.” It isn’t only Wells Fargo that is susceptible to corporate greed.

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