To get a private student loan, credit is a critical factor.

If you’ve shopped around recently for private student loans, you’ve probably found out that you need a healthy credit score, or a cosigner with good credit, to qualify. But what determines your credit rating? There are a variety of factors that are considered, including your payment history (ability to consistently pay your bills), amount owed, credit history (how long you have been using credit), the amount of new credit you possess and the types of credit (bank cards, gas cards, loans, etc) you carry. Your credit score will range between 300 and 900, with anything above 720 being considered a good score. For most college students, this is not the case and they must use a cosigner to secure private student loans. Even if you only take out federal student loans while in college, you should be aware how your student loans will affect your credit rating.

Will my loans be reported as one debt or several?

Typically, each time you take out a student loan (semester, quarter, etc) it will be reported as a separate debt. For example, if you are disbursed a loan payment each semester over four years, you are likely to see multiple student loan accounts on your credit report. This may have a negative impact on your score, as it will appear as though you have several accounts, even if they are through the same lender. Federal or private student loan consolidation may be options to consider when you graduate.  Consolidation allows you to combine multiple loans into one, single loan.  However, be sure to ensure doing so will not substantially increase your overall cost of borrowing.

Will paying off my loans early hurt my credit score?

No. Contrary to what you may have read elsewhere, paying off your student loans early will not reduce your credit score – this is a myth. Banks do not harm your credit score for paying early, nor is the amount of interest you pay (or don’t pay) reported to the credit bureaus.

Am I penalized for not making payments during a forbearance, deferment or grace period?

The short answer is, no you won’t be penalized.  During a deferment, grace period or forbearance, you are not required by the terms of your loan to make payments.  Therefore, no negative activity will be reported to the credit bureaus. Federal loans offer you the option of deferring payment of loans while you are in school and enrolled at least half time.  Many private lenders will allow you to defer payments while you are in school as well.  Once you graduate, government loans offer a short grace period in which no payment is required and many private student loans offer this feature as well.  In addition, if you find you are having difficulty making your payments due to a financial hardship, and your lender approves you for a forbearance, you will not be reported for non-payment.  If you ever feel you may miss a payment for any reason, always contact your loan servicer or provider and let them know.  They will try to work with until you can get back on track.

Basically, if you make your regularly scheduled payments, or even pay off your student loans early, your credit history will remain in good standing. After you have paid off your college debts, your credit-to-debt ratio will improve and your score should go up. Never let your students loans slip into default status if at all possible.  Not only will this damage your credit score, but it will be much more expensive to pay off your loans due to collection costs and actions such as wage garnishment are a real possibility.  Of course, the easiest way to avoid getting into this situation is to keep your debt to a minimum and only take out what you absolutely need for college. Do a little research to find the best student loan rates, borrow federal student loans first and don’t forget to check out possible scholarships!

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In an effort to encourage recent college graduates to consider calling Niagara Falls home, they’ve dangled the proverbial carrot in front of them by offering to pay $3,500 a year toward their student loan debt (for up to two years). To qualify, applicants must have earned an associate, bachelor or graduate-level degree, and they must be willing to rent or purchase a home within a designated area of the city.

Similar programs exist in other areas too. For instance, Kansas offers both income tax relief and student loan repayment assistance through its Rural Opportunity Zone Program. To qualify, applicants must establish residency in one of the many eligible counties between July 1, 2011 and January 1, 2016. Applicants must have lived outside of Kansas for a minimum of five (5) years prior to establishing residency, and must maintain residency for the full year in which the credit is being claimed. Those who qualify may receive up to 20% of their student loan debt paid (up to $15,000) and have their state income tax liability waived. The benefits may be received for a maximum of five (5) years.

Sounds great, right? Not so fast. I can totally understand why Niagara Falls wants to lure younger, more educated residents to its area, but is $7,000 really worth the risk in moving to an area best described as urban blight? The most recent unemployment rates released by the U.S. Bureau of Labor Statistics lists Niagara’s rate at 11.5 percent, which is 3 percent above the national average; not too encouraging for a recent college graduate seeking a job. If you’re considering Detroit, forget about it. Its unemployment rate currently sits at about 16.9 percent and it was rated one of the most dangerous cities in the U.S. – no thank you! Kansas actually may be the winner in this arena, with a state unemployment rate lower than the national average (around 6.2%) and a lower violent crime rate than both New York and Michigan; then again, you still have to deal with all those tornadoes!

Instead, I offer this advice to college students seeking relief from their student loan debt – consider student loan forgiveness programs. For many professions, including teachers, social workers, medical professionals and even attorneys, states will offer to help repay your student loan debt in exchange for a few years of service in an under-served or low-income area. Best of all, you decide where you want to live and work.

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You won’t have to crack open a thousand-page book to get a handle on private student loans.

If you have exhausted all federal financial aid, grant and scholarship opportunities, and still find you need additional money for college, a private student loan may be the solution. Unlike federal loans, which require students to attend school at least part-time, a private loan can be used for any number of credit hours and students are not required to complete the Free Application for Federal Student Aid (FAFSA). Keep in mind that students are not guaranteed approval for a private loan and must meet certain criteria. In most cases, students will need the following when applying for a private student loan:

• Social Security Number
• Driver’s License
• Be a U.S. citizen, permanent or temporary resident alien
• Provide employment and income information (annual gross amount, contact information, etc)
• Provide contact information for his/her intended college
• Provide monthly housing/living expense information
• Co-signer (who must provide the same documentation)

Typically, students do not qualify for a private loan without a co-signer. In addition, any permanent or temporary resident alien applying for a loan will be required to have a co-signer, regardless of his/her credit history. According to the Boston Globe, nearly 90 percent of private loans issued have a co-signer. Anyone with a good credit history may act as a co-signer, including family, friends and co-workers. Even if you do qualify for a private loan, you may want to add a co-signer to help reduce your interest rate. Many private loan lenders will allow a co-signer to be released from the loan once a total of 24 consecutive, on-time payments have been made. In some instances, lenders will also forgive the loan if the student beneficiary is deceased or becomes permanently disabled. Always be sure to check with the lender about these provisions prior to having another party sign any loan documents or contracts.

Once the preliminary application has been processed, the lender will more than likely request a Self-Certification Form. The student will need to submit information on his/her tuition, room and board, fees and estimated financial aid being received. The difference between what the student can expect to pay for college and what is being received through federal loans, scholarships and other aid is the amount available for the private loan. Lenders will also contact the college to verify this information, as well.

If you are approved for a private student loan, you can use the funds for any education-related expense. This can include not only those fees typically covered by federal loans, but also food, clothing, parking passes, travel abroad, testing fees, equipment purchases (computers) and even the occasional trip home during breaks. While a private loan can offer more flexibility, keep in mind you may have a higher interest rate and fewer options if you find you cannot make your loan payments on time. Before deciding if a private student loan is right for you, compare offers by various institutions and read the fine print.

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Student loans don’t have to be confusing. We’re here to help!

The world of student loans can be very confusing. Do you know the difference between subsidized and unsubsidized? How does a Direct Plus Loan for parents differ from one for a graduate student?  Not to mention the differences between federal and private student loans; searching the Internet can sometimes lead to further confusion and frustration. Luckily, we are here to break down each type of loan into easy to digest nuggets of enlightenment.

First, let’s start with federal student loans. After you have applied for every possible grant and scholarship available to you or your student, start here before even considering a private student loan.

Perkins Loan

If you are an undergraduate or graduate student with exceptional financial need (as determined by the Free Application for Federal Student Aid – FAFSA), you may receive a low-interest (5%) loan through your college/university. Although this loan is made with government funds, your school will be your actual lender. Students may borrow up to $5,500 per year as an undergraduate and up to $8,000 per year as a graduate student. The total amount allowed (including undergraduate and graduate studies) is $60,000. You must start paying back the school nine months after you graduate, leave school or drop below a part-time status.

Direct Stafford Loans

Subsidized – Direct Subsidized Loans are offered to undergraduate and graduate students with financial need (as determined by FAFSA). You loans are not charged interest while you are in school at least part-time or during grace or deferment periods. Depending upon a student’s year in school and status (dependent/independent/graduate), he/she may receive between $3,500 – $8,500 annually, not to exceed $65,500 (includes undergraduate/graduate programs) upon graduation. The current interest rate is fixed at 3.4% (due to increase to 6.8% on July 1, 2012).

Unsubsidized – Direct Unsubsidized Loans are offered to undergraduate, graduate and professional students regardless of financial need. Unlike subsidized loans, the interest on these loans begins to accrue upon disbursement of funds. Students may choose to pay the interest while in college, or have it added to the principle amount of their loan upon graduation. Loan amounts range between $5,500 and $20,500 with a maximum of $138,500 (undergraduate and graduate combined) allowed over the life of the loans. The current interest rate is fixed at 6.8%.

Graduate and professional students enrolled in certain health profession programs may receive additional unsubsidized Stafford Loan amounts each academic year beyond those discussed above, but the increased aggregate loan amount cannot exceed $224,000 (includes a maximum allowed of $65,500 in subsidized loans). All Stafford Loans also include an origination fee (1%) per loan received, which is deducted prior to disbursement.

Direct Plus Loans

For graduate and professional students – Any graduate student or professional degree seeking student seeking a Direct Plus Loan must not have an adverse credit history and must complete the FAFSA in order to receive funding. The amount of the loan is the total cost of attendance minus any other financial aid the student may receive. A four percent (4%) fee is deducted upon disbursement for each loan. The current fixed interest rate is 7.9%.

For parents – Any biological or adoptive (in some cases a stepparent may apply) parent may apply for a Direct Loan, as long as the student is dependent and attending college at least part-time. The parent must not have adverse credit. If he/she is not approved, another person may endorse (co-sign) the loan. Both student and parent(s) must be U.S. citizens or eligible noncitizens and cannot have defaulted on any previous federal student loans. The annual loan limit is the actual cost of attendance minus any financial aid the student may receive. As with the graduate Direct Loan, there is a four percent (4%) fee per loan and interest (7.9%) begins to accrue upon disbursement, as well.

Private Student Loans

Unlike federal student loans, private student loans are based upon a borrower’s credit history. Since most students are not old enough to establish a stable employment history or earn enough to qualify, most will need a co-signer to secure a loan. Similar to federal loans, private loans cannot exceed the total cost (tuition, fees, housing, living expenses, etc) for a student to attend a school, but the funds may be used for items purchased off-campus and for travel expenses (parking, gas, study abroad). Rates vary by provider, with many ranging between 2.5% (variable) and 12.9% (fixed). Students can elect to receive the funds directly or have them sent to their school. Private loans often offer a grace period for repayment, as well. Be sure to compare lender offers before making a final decision.

Students and parents should always exhaust all other financial aid options, such as private scholarships, grants and work-study before turning to private loans. Do some research and know what you are getting into before signing on the dotted line. For those who may have a question or problem with a federal student loan, be sure to contact the Federal Student Aid Ombudsmen Group. For those with private loan issues or complaints, please contact the Consumer Financial Protection Bureau.

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