Private Student Loans

Should You Get A Private Student Loan?

You may find you need a private student loan at many points in your education. If you do your research and understand what you are committing yourself to, you will find that  private student loans are an excellent way of rounding out your funding picture. But that is precisely how they should be used – to round out the picture. Students should only consider private loans once they have exhausted their federal and state loan options.

Why is that? Although Federal and State governments are dead serious about being repaid the money they loan you, their primary aim in lending this money is to facilitate your education and to help you become a more productive citizen through education. The interest rates are lower than private loans, the terms are much more transparent, and the repayment options are more flexible. Private lenders, on the other hand, are businesses whose reason for lending the money to you is to make money off the loan. These loans often end up being much more expensive than public loans and the terms more rigid.

You can follow these steps to get a clear idea whether you need to look for a private loan and how much you will try to borrow.

Calculate Your Costs

Once a student (or their parents) has filed the Free Application for Federal Student Aid (FAFSA) and gotten all the federal loans, grants, work-study and scholarships they are entitled to, then it is time to consider how a private student loans could help.

  • Every lender’s website includes a college cost calculator. FinAid’s site (www.finaid.org/calculators) contains a number of specialized calculators. These can help you arrive at an accurate understanding of your annual costs, as well as the real cost of each loan.
  • Take your savings, scholarship and grant awards, and federal student loans awards. Subtract this figure from your real cost of attending school – that is tuition plus room and board, books, computers, transportation, and any additional student fees. This figure is a good estimate of the shortfall that private loans can make up.

Choosing a Private Lender

Every private bank and student loan lender offers private student loans. There is a huge array of options, with products designed for specific types of students, different interest rates, borrower fees, loan limits and repayment terms. The fees charged by some lenders drastically raise the cost of the loans, so a loan with a fairly low interest rate but high fees can ultimately cost more than a loan with a higher interest rate but no fees. Examples of the insitutions that offer private loans are;

  • Private banks, such as Bank of America and Wells Fargo, and
  • Student Loan lenders Sallie Mae and Nellie Mae.

A few facts to bear in mind when you consider private loans:

  • These loans are credit-based. Students with poor credit or no credit will need a co-signor who has good credit;
  • There are often no repayment periods grace periods, which means repayment begins immediately. If possible, try to negotiate on this point. After all,  the whole reason you are borrowing money is to be able to concentrate on your studies without having to work full-time, too;
  • Interest rates may be variable, which means the lender can raise them according to terms it sets;
  • If there is a grace period, lender will often advertise a lower interest rate for this period, with a much higher rate when the loan goes into repayment.

FinAid’s maintains an extensive comparison chart of private loans on the market that could provide a good starting point for research. This resource is at www.finaid.org.loans/privatestudentloans.