Should You Consider Applying for a Private Student Loan?

Private student loans are a common way of dealing with college expenses. Just like any loan, a private student loan helps you in a time of need. So, rather than sitting idly by and complaining that you cannot afford college, with a private student loan you can and will afford college.

Private student loans are also 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 a one of them can ever touch 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.

Even before you pursue a federal loan though you should try your best to get a grant of some sort. When you submit the FAFSA, you open yourself up to the world of financial aid opportunity. This means federally guaranteed or funded grants and loans. If you do not qualify for a federal grant or the Pell Grant, look into the grants offered by your state. A state grant can pay for a large portion of your tuition depending on where you plan on attending school.

You should also make a serious effort to get scholarship money. If that means writing essays, doing community work and pestering people for letters of recommendation, so be it. Scholarship money is truly an untapped resource for college funding.

If, after exhausting all of these options, you still find yourself coming up short financially, it is then and only then you should consider getting a private loan.

The Ins and Outs of Private Student Loans

Unlike federal 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 credit.

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

Buying factors include:*

  • Interest rates throughout the life of the loan - lenders may accrue interest at one rate while the student is in school and another after graduation
  • Payment options - lenders typically offer loans that are payable immediately, interest-only loans while the student is enrolled, and no-payment loans until graduation
  • Incentives - lenders may offer improved or tougher terms based on the student's payment record
  • Origination fees - lenders typically charge a fee for originating the loan that is added to the principal of the loan.

Many times, students will need to have a cosigner in order for them to qualify for a loan. This is because young people often do not have very much credit, so the lender will be reluctant to take a risk on them. When you cosign, however, the cosigner’s credit helps to lower your interest rate and improve the terms of the loan. Then, if you pay the bill on time, your credit score will steadily build.

Being a Cautious Borrower

Even so, you are never going to want to borrow more money than you absolutely need, which leads to serious problems later down the line. Since private loans are not subsidized, you will be responsible for making payments on them while you are in school. If this is not feasible for your current situation, you parents may need to consider a Parent Loan for Undergraduate Students (PLUS), which then puts the burden of responsibility on them.

If you can afford to make payments while in school, you will probably be just fine. However, 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.

Another thing to take note of is the interest rate. A very high interest rate just means you will be paying the loan back for longer and that it will cost you more money. Be also on the look out for introductory offers with low interest rates that then skyrocket after a few months or a year. Starting out at 11% for a private loan is great, but not when it escalates to 22% next year! I know you want to fund your education right this instant, but it really does pay to shop around in order to find the right student loan company for you. It is also beneficial to check out the National Education Loan Network (Nelnet) and ACS Student Loans, as they may be able to help you as well.

*Source: Wikipedia