Private Student Loans
After you first take advantage of all other forms of financial aid including federal financial aid, federal student loans, and outside scholarships, you may discover you still have expenses you need to cover to pay for your education. That's when you might want to consider private student loans. Check out our short video for a quick look at all of the important details.
Private student loans can be an option to help you fill the gap between what federal, state, scholarship and school assistance provides and what you actually need in order to afford higher education. Private student loans (sometimes called alternative student loans) are credit-based consumer loans to be used specifically for paying educational expenses.
Much like auto or home loans, private student loans are based on your credit-worthiness. Most students will need a credit-worthy co-signer such as a parent or other relative in order to obtain a private loan. Terms and conditions applicable to these loans vary greatly and it is important to pay careful attention to the terms you are offered before making a financing decision.
Borrowing Process for Private Student Loans
Private student loans are offered from many financial instituitions, but vary by loan provider and by borrower credit. Factors such as interest rate, total cost of loan, Annual Percentage Rate (APR), length of repayment, loan minimum and maximum as well as loan fees and borrower rewards or repayment incentives/benefits should be carefully considered when researching and choosing a private student loan.
Some parents want to place the responsibility for education finance on the shoulders of their child. A private student loan is made in the name of the student borrower and is backed by the parent cosigner (in most cases). In a sense, because the student is the primary borrower, they have "skin in the game" and many parents feel bearing this responsibility will teach their child the valuable life lessons that can only be learned experientially.
We've created LoanFinder , a loan finding tool to help match students and parents find and compare loan options before beginning the application process.
Private Student Loan Limits
Most private student loans will allow a student to borrow up to their school's Cost of Attendance minus other financial aid including other student loans. In some cases, the school's cost of attendance may exceed the maximum loan amount offered by the provider and in other cases a student may not qualify for the full loan amount requested. Private loans generally have a minimum that can be borrowed and that amount is usually around $1,000-$2,000.
Private Student Loan Interest Rates
Interest rates vary widely based on loan program and the credit of the student (and cosigner). Lenders offer both variable and fixed rate loan programs. A variable rate means that the rate will change over the course of repayment. Interest rates for fixed rate loans do not change. The rates offered for fixed rate loans are generally higher than variable rate loans. If you feel that the fixed rate offered is reasonable and you are afraid that interest rates will increase substantially during the repayment period of your loan, a fixed rate loan might be a good option.
Many lenders offer a small interest rate reduction if the borrower enrolls in automatic payments. Borrowers who elect to have their student loan payment directly debited from checking benefit by ensuring their payments are made on time. On-time payments are an important part of building good credit—especially for students who are new to credit and financing. A 0.25% interest rate reduction is a very common reduction amount.
Private Student Loan Fees
Some loans charege a fee at origination. Origination is simply the time at which the loan is disbursed or paid to the school. It's important to understand the impact of fees charged. Origination fees are always added to the loan amount you borrow. As such, you are borrowing the amount of loan you need to pay for school plus the fee added by the lender. In today's private loan market, origination fees are the exception but pay careful attention as to ensure that either a fee is not charged or that it is taken into consideration before borrowing.
Private Student Loan Repayment
One feature of many private loans is the ability to completely postpone (defer) payment of principal and interest until you graduate from college. Many lenders require a small "token" payment while you are in deferment. These payments are usually in the range of $25 to $50 per month. Making these payments will help reduce your cost of borrowing and also establish the habit of paying your loan on time every month. It's a great way to really understand the responsibilities that come with borrowing.
The amount of time you will have to repay your loan will vary depending on the loan program and how much you borrow. Repayment tersm typically range between 10 and 20 years.
Some lenders offer repayment incentives such as interest rate reduction or cosigner release for making a number of consecutive on-time payments. However, in the case of cosigner release, the student usually has to meet credit and income requirements as well.
Other Factors to Consider
Private student loans almost always offer better terms than credit cards. Also, they can be a good alternative to home equity lines of credit. On one hand, a student or, more likely, a parent may be able to get a very attractive rate on a HELOC, but they are also exposing themselves to risk in the even the family has a large uninsured expense or ends up being upside down on the mortgage and needs to sell the home the HELOC is secured by. If you are considering a HELOC, talk to a professional financial planner and discuss your specific circumstance.
While we actively encourage students and families to pursue federal student loan options before considering private education loans, there are many situations where a private loan may be a good alternative. Sometimes parents want their student to be responsible for paying for his or her education, in which case a private loan may be preferable to a Direct PLUS Loan for Parents. Also, parents with good credit may qualify for low private loan rates which may be better in short term repayment options. In other cases, having the full educational costs covered up front with federal and private loans may mean that the student can focus on their studies rather than having to meet some expenses with earnings from a part-time job.
Compare Private Students Loans Before Borrowing
Whatever your situation may be, a private education loan can be an attractive and affordable option to help pay for education expenses. Just remember, borrow only what is needed and carefully compare private student loans before borrowing.
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