With tuition costs rising quickly and caps on federal financial aid rising slowly, an increasing number of college students are turning to private student loans from financial institutions such as banks and student loan companies after maxing out federal aid. Private student loans are different from both typical loans and federal student loans
What are Private Student Loans?
Private student loans are unsecured loans, which means the student does not put up property as collateral. Interest rates are influenced by credit history and can often be reduced by using a co-signer, but vary widely.
Private student loans are treated specially in the event of a personal bankruptcy, so students may not incur a total debt (including scholarships, fellowships, and federal loans) greater than the cost of attending school.
Private student loans offer a variety of repayment plans and deferral options, some similar to federal loans. Interest rates also vary widely from loan to loan.
Drawbacks to Private Student Loans
The interest rate is typically higher than interest rates on federal loans, and repayment plans may not be as advantageous for the student. Also, since most students who turn to private loans already have a considerable amount of student loan debt, the decision to take on more debt is a big one.
Alternatives to Private Student Loans
Alternatives to private student loans include transferring to a less expensive institution, finding a part- or full-time job, and applying for scholarships.
All of these alternatives have drawbacks. Transferring is difficult and may set students back as much as a semester. Working during school, particularly full-time, takes time and energy away from studies. And applying for scholarships doesn't guarantee receipt. But none of these options require taking on more debt.
Before deciding which option is best for financing your education, carefully consider the pros and cons of all options. How close are you to graduation? What are your job prospects like? Have you successfully earned scholarships before?
Where to Get Private Student Loans
If you decide private student loans are the best choice for you, you have many options. Many lending institutions, especially the larger commercial banks, promote and offer private student loans, as do a number of companies that specialize in offering private loans to students, such as Sallie Mae. Not all are created equal. If you need help understanding the loan fine print, your school's financial aid office can help you compare loans.
How to Get the Best Loan Deal
Your interest rate is largely dependent on your credit history. Since most students don't have a long credit history, you may need a parent or other cosigner to get the best interest rates. Some loans have one interest rate while you are in school and another after you graduate.
The repayment plan is also another important aspect of the loan. Compare repayment plans carefully and calculate how much interest you will end up paying over the life of the loan.
Most lenders charge an origination fee for originating the loan, which is added to the loan principal. That means you will be charged interest on the origination fee as well as the original principal.
Finding the best deal on a private student loan requires attention to detail. You may want to seek advice on deciding between different loan options from a parent or financial aid advisor.
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