Private Student Loans

A college degree doesn't come cheaply, and many students must find financial aid of one kind or another. Federal loan programs are available for those who can demonstrate their need, but it often can't meet all of your budgetary needs. What can you do then? Private loans are available to students through banks and specialized lenders.

The good news about private loans is that you can usually find higher loan limits, and many come with a grace period of six to 12 months following graduation when you're not required to make payments. The bad news is that your interest rates will likely be higher. There are several things you need to keep in mind when shopping for a private loan. Interest Rates Even though private loans come with higher rates than federal loans, those rates are still lower than non-specialized private loans. (However, legislation is pending that may bring government loan rates higher.) Your private loan will be based on your credit history or your parent's credit history if they're applying for the loan.

Because of this, rates vary a great deal. If you've got good credit (or your parents do), you'll end up paying less over the life of your loan than someone with bad credit. Lenders will provide a statement of the Annual Percentage Rate, or APR, for the loan before you sign on the dotted line. This is probably the best number to use when you compare different loans from different lenders. Fees Many private loans require you to pay an origination fee---a charge based on the amount of your loan.

These fees are sometimes taken out of the total loan amount, or may be added to the total loan amount. If you're lucky enough to have a really good credit score---of 800 or higher---you might be able to find a low-interest loan with no fees. However, most students getting ready to enter college haven't established that kind of credit yet. The good news is that the loan will help you establish your credit---as long as you make your payments on time---so when you need a loan later in life, it will be that much easier then. Eligibility With federal loan programs, your eligibility is generally determined by financial need. If your income (or your parent's income) is higher, you won't qualify for as much aid.

With private student loans, your eligibility is usually based on credit history. Shop Around Once you're on the lookout for a loan, it's important to remember to consider all of the terms of the loan. While the APR is key, and will help tell you whether you'll end up paying more or less, there are other terms and benefits that you should take into account. Does the lender offer a deferment? A deferment allows the borrower to take a specified amount of time after leaving school before beginning to make payments on the loan. Why would you need a deferment?

It takes some time to start a career once you're done with school, and you'd rather not be hit with payments until you've got steady work. Does the lender provide forbearances? A forbearance provides for times of financial or other hardship. In other words, if you come upon hard times, the lender will suspend your payments for a while.

Advertisement

Get More Information