Should You Consider Applying for a Private Student Loan?

How to Use Alternative Financial Aid

Private student loans are an option for students that need extra financial assistance when federal loans just don’t cover the cost of college.

You’ll find private loans for a variety of students:

  • Undergraduate private loans
  • Graduate private loans
  • Med school loans
  • Law school loans
  • Bar exam loans

Private student loans are often referred to as alternative student loans, though we use the term “private student loans” so it will not be confused with other alternative loans like graduate student loans and the PLUS loans.

Before you pursue a private student loan, there are a few things you need to take into consideration.

Exhaust All Other Options

While there are many great private loans available for students these days, not one can compete with the great benefits of federal student loans. Federal loans have the lowest interest rates, are often subsidized and provide a grace period of six to nine months. A private lender just cannot do this.

Before you take out a private loan:

  • Your absolute first step is to apply for federal student loans. File the FAFSA. Unfortunately too many students turn to private loans first, before they even try to get approval for federal aid.
  • When you file the FAFSA you are also considered for federal grants, such as the Pell Grant.
  • Check your state-funded education programs. Many states offer students money from state lottery coffers, grants, and scholarships for those with very low incomes.
  • Search and apply for scholarships that are relevant to your educational goals and personal interests. You will never know if you don’t apply. Millions of dollars in scholarship money goes unclaimed each year because students thought they wouldn’t qualify or they were too lazy to try. Many scholarships are very competitive; others only receive a handful of submissions. Why not try for some free money?

The Ins and Outs of Private Student Loans

Unlike federal student loans that are more often than not based on your level of need, a private loan is based on your credit score. Yes, in this way, it is exactly like every other loan out there. However, you may be able to get a slightly lower interest rate because you intend to use the money for college. Many banks and credit unions offer special education loans for students with bad or poor credit.

Most financial institutions that offer private student loans include large banks (Citibank, Chase, Bank of America, and Wachovia) and specialized companies (Sallie Mae, MyRichUncle, Astrive Student Loans, Act Education Loans).

Private Loan terms:

  • Payment options may vary, but expect to pay something while you’re in school: some lenders require you begin full payments immediately, others may offer you an interest-only option, or deferred payments while you’re in school.
  • Borrower Incentives are designed to attract borrowers and include interest rate and fee deductions for such things as making electronic payments and consecutive on-time payments.
  • Origination fees are common loan fees added on to the loan principal.

Using a Co-Signor

When you have no credit or bad credit chances are the only way you’ll qualify for a private loan is with a co-borrower or a co-signor. If you can use a parent as a co-signor, great. But in some cases parents don’t have such good credit either. Find someone you trust and who knows you, the better your co-signor’s credit the better your interest rate on the loan.

Guess what? You build your credit even as the co-borrower on a private loan:

  • Make payments on time.
  • Many lenders will also agree to release your co-signor from the loan once you’ve made so many consecutive on-time payments.

Repaying Private Loans

Realize that many private loans commence repayment immediately, while you’re in school. You need note just how much you will be expected to pay each month. If the payment amount exceeds what you can afford, speak up! Never sign a loan that you cannot reasonably afford. You can get a college education, but making foolish money decisions will get you nowhere fast.

Tips when shopping for a private student loan:

  • Avoid loans packaged with high interest rates.
  • Beware of “introductory” offers and interest rates—these often skyrocket after a certain period of time.
  • Shop around and compare lenders before you sign any papers.

Remember, private student loans have their place, but your best strategy is to pursue all other financial aid forms, first: federal student loans, grants, and scholarships.