Private Education Loans
Before You Borrow Private Loans. Make sure you exhaust the following sources of financing before you consider private loans for college:
Funds You Do Not Have to Repay. Explore federal and state grant programs, like the Pell Grant, as well as scholarships that may be available from state government, private organizations or the school you plan to attend.
Funds You Work to Earn. Consider a part-time or summer job. See if you qualify for work-study programs offered through your school.
Federal Student Loans. Federal education loans go by names like Direct, Stafford, PLUS and Perkins. The interest rates and repayment terms on federal student loans generally are more favorable than those you are likely to obtain with private loans.
It’s important to know that the U.S. government is the largest single source of financial aid for college. So, although you should aggressively seek out all forms of student aid, you definitely should fill out the Free Application for Federal Student Aid, or FAFSA, the form necessary to qualify for federal student aid programs.
Differences Between Federal and Private Student Loans Interest Rates. As noted above, because of federal subsidies, interest rates on federal student loans are likely to be lower than rates on private loans. In addition, rates on new federal loans are fixed for the life of the loan. Rates on private loans may be fixed, or variable, meaning that the rate can move up or down depending on prevailing interest rates.
Interest Subsidies. If you qualify for a Direct Loan, the federal government will pay the interest on your loans for you while you attend school, during the six-month grace period after you leave school, and if you qualify to postpone payments under a deferment. On unsubsidized loans, PLUS loans and private loans, you are responsible for all of the interest that accumulates on your loan while you attend school.
Fees. Federal student loans carry upfront fees. Fees on private loans vary widely, with some lenders charging no upfront fees and others charging fees that are significantly higher than fees charged on federal loans.
Credit Standards. Direct Stafford loans are available regardless of your creditworthiness. PLUS loans require only that the borrower not have any adverse credit like bankruptcies and foreclosures. On the other hand, private loan interest rates are largely determined by your credit score. The higher the score, the lower your interest rate. If your credit score is low, you may not be able to get a private loan unless you can convince a credit worthy person to co-sign the loan for you and thereby promise to repay it if you don’t.
Repayment Flexibility. Federal student loans offer far more flexible repayment options. For example, you can repay federal student loans under standard, graduated, income-sensitive income-contingent, income-based or extended repayment plans. In addition federal student loans offer liberal terms for temporarily delaying or reducing payments in the event you are unemployed or facing other financial challenges. Private loans typically require you to pay equal monthly installments over a set period, although some private loans permit interest-only payments for a brief period.
Loan Forgiveness and Cancellation. Federal student loans offer options for forgiving outstanding amounts based on your service in certain occupations. Your federal student loan balance also will be cancelled, if, for example, you die or become totally and permanently disabled. Private loans generally offer little in the way of forgiveness or cancellation options.
Loan Limits. Direct Stafford loans have set maximum amounts you can borrow each year and throughout all your college years. Private loans typically permit you to borrow up to your full cost of attendance, less other sources of financial aid. But you can get the same benefit from PLUS loans, which also have no set loan limits. So, dependent undergraduate students can have their parents take out PLUS loans to cover their remaining college costs; graduate and professional students should consider PLUS loans, which offer the same feature.
Tips for Borrowing Private Loans
If, after exhausting all other financial resources, you find your funding still falls short of your college costs, you may have to take out private loans. Consider the following tips to get the best private loan deal.
Consider a Co-signer. Your lender may require a co-signer if you have no credit history or a poor credit rating. By using a co-signer, you may be eligible for lower interest rates and reduced loan fees.
Work With a Reputable Lender. Ask your financial aid office for recommendations.
Compare Interest Rates and Terms. Compare the Annual Percentage Rate, or APR, on various private loans. Understand how often your interest rate can change and what the maximum rate may be. Learn about any fees that will be charged on your loan. Consider:
- How long you will have to repay the loan.
- What repayment options are available.
- Whether you are entitled to defer loan payments and under what circumstances.
- When payments are considered late.
- The penalties for making late payments.
Find out if your lender offers online access to your account and how responsive your lender is to your inquiries. Your school may offer a tool that permits you to compare rates and terms on both federal and private loans.
Plan Ahead. Consider what your monthly payments will be on both your private and federal student loans in relation to your starting salary after graduation. A good rule of thumb is that your combined monthly student loan payments should not exceed 8 to 10 percent of your gross monthly income. Otherwise, you may have to cut other items in your household budget to make your monthly loan payments.