Private Student Loans

Student studyingCollege is expensive, and the costs seem to keep going up. Students are exploring more and more ways to fund these ballooning costs for their higher education. Student loan debt now tops $1 trillion.

When seeking financial aid, your first step should be to exhaust all forms of scholarship and grant money you may be eligible for. This is essentially free money that you don’t have to pay back. Your next option should be federal financial aid. The U.S. Department of Education offers both grants and loans with low and fixed interest rates with flexible repayment plans. You will need to fill out a Free Application for Federal Student Aid (FAFSA) in order to determine how much aid you may qualify for through government funding.

Only as a last resort should you take out a private student loan. Private student loans are offered through financial institutions and organizations, and often don’t have the same flexibility or favorable terms as a federal loan. Unfortunately, many times grants, scholarships, and federal loans are just not enough to cover the costs of college, and you will need private student loans to bridge the gap. In addition, federal funding is not available for non-U.S. citizens, while private funding may be.

Fixed and Variable Interest Rates

interest rate ranges for student loansPrivate student loans are made by a lender, such as your school, state agency, bank, credit union, or other financial institution. These loans are unsubsidized, meaning you pay the interest yourself. Interest rates can be either fixed or variable. Variable interest means that as the market changes, so does the amount of interest you are responsible to pay. Interest rates are usually based on the London Interbank Offer Rate, LIBOR, or the Prime Lending Rate, called PRIME.The LIBOR is a three-month average of interest paid in the London market on deposits of U.S. dollars there. PRIME rates are published by the Wall Street Journal and based on what banks charge their customers whom they consider the most worthy of credit. Different lenders will offer loans based one of these two indexes, usually with an additional percentage tacked on. Interest rates can vary greatly and can be as high as 18% in some cases. Private student loans can also have an origination fee attached to them on top of the interest rates and principal amount of the loan. The principal is the amount of money you are borrowing. When seeking a private student loan, look for one with little or no fees as well as low or fixed interest rates.

Eligibility and Application Process

What are your financial aid options?Often private loans require you to have an established and decent credit score to be eligible. Most students straight out of high school have yet to establish credit and therefore will require a cosigner. A cosigner is someone with good credit standing who agrees to be your guarantor or be financially liable for you during the life of your loan. Generally speaking, the better your – or your cosigner’s – credit, the better your private student loan terms. Private loans may have higher loan limits and more generous loan cap amounts than federal loans for these borrowers. Private lenders may require a certification from the school in order to determine the maximum amount of money, or cap, they will offer to lend you. This is based on the cost of attendance minus any other aid you may already be receiving. Each private lender will set the terms, conditions, and eligibility requirements for the loans they offer.

The application process may also differ from lender to lender. Many have the option to fill them out electronically on their individual website. You will generally need your name, date of birth, school information, Social Security number, and income or tax information to apply. Most private lenders will perform a credit check to determine your eligibility. Private lenders do not publish the rate you will receive before the application is complete, so you should apply for more than one in order to determine which one offers the most favorable terms.

Once you have been approved, the lender will send you a letter detailing the terms and conditions of your loan. The money is not disbursed until you accept these terms and sign a promissory note that details your rights and responsibilities as a borrower. This note is a legally binding contract between you and the lender in which you agree to repay your loan and all interest accrued. Be sure to keep a copy of your promissory note for your records.

Loan Disbursement Information

Generally speaking, loans are disbursed directly to the school and used to pay education-related expenses. This means that the loan will cover your tuition and fees and then, if there is any money left over, it will be disbursed to you to cover any other outstanding educational expenses. Depending on the type of loan offered by your lender, after tuition and school fees are covered, you can use a private student loan to pay for:

  • Room and board
  • Books
  • Computer equipment
  • School supplies
  • Dependent child care
  • Transportation

Loans are generally based on the total cost of attendance at a school, which is not limited to just the cost of enrollment. When applying for a private student loan, you should only borrow however much you actually need which may be less than the amount offered to you. It can be very easy to get into debt quickly and difficult to dig yourself out.

Refinance your student loan

Repayment

Repayment OptionsWhile some private loans will allow you to defer payments until after graduation, dropping below half-time status, or leaving school, many will require you to pay as you go, or at least pay the interest while you are still in school. Some loans offer a grace period, or time after graduation before your loan repayment period starts, but not all private loans do. Federal student loans have income-dependent repayment plans, as well as deferment and even forgiveness options that are not offered by private loans. Failure to make your payments on time can negatively affect your credit score as well.

Many lenders have flexible options for you to pay your bills in several accessible ways such as:

Your lender will be able to set you up on a repayment plan that works for you. A loan servicer, or the company that you pay your bills to and who is responsible for the administrative support of your loan, is able to work with you to find a viable and manageable repayment option. If you are having trouble making your payments, contact your loan servicer as soon as possible. It is also your responsibility to make sure your loan servicer has your current contact information and to make sure you are aware of when your repayment period starts.

Private loans may be a realistic option for you if your other sources of aid don’t cover what you need to achieve your educational goals. You should be sure to contact your financial aid office at your school to determine what is the best option for you and your circumstances as to avoid getting into a financial situation from which you cannot easily recover.

 
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Types of Student Loans