Private Student Loans

Many of the common Federal student loan programs require no credit check and provide substantial sums for financial aid. Unsubsidized loans, in which any interest accrued while the student is in school making satisfactory progress, are among the most desirable.

But these programs are need based and often carry other criteria that make it difficult to qualify. Even when students (and parents) do qualify, the loans only cover a portion of the total cost of education, in many cases. When students and their parents find themselves in that situation, they can turn to private loans to make up the difference.

Private loans, too, have pros and cons, however. A credit check is almost universally required. For those with a good credit history that’s no problem. But ‘good’ is a relative term and if it isn’t good enough, borrowers will find themselves paying higher than optimal interest rates.

Beyond the stated interest rate, there are other financial implications of private loans. Fees are often tacked on (or, rather taken off) nominal loan amounts. A relatively modest loan of $4,000 may easily have 4% in fees applied prior to distribution. That means $160 of the total is never seen by the borrower, but must be repaid. As a rough guide, every 3% of fees is equivalent to an additional 1% on top of the stated interest rate.

Private loans do have certain advantages, however.

The obvious one was alluded to above: the funds are available. Private lenders exist to make a profit on the interest and fees they charge. They have an interest in making money available to borrowers. As a consequence, they will work very hard to ensure that every applicant qualifies. Federal lenders, on the other hand, have an inflexible set of criteria and there is typically no real appeal if your application is denied.

Not having to deal with that impersonal, often illogical, bureaucracy is another advantage of private loans. Lenders maintain customer service departments that, though understaffed, exist to answer questions so that customers can get answers. Federal loan programs typically have contacts and help available as well. But the answers one gets are hit or miss in terms of quality.

But many other practical considerations apply that make private loans desirable.

Neither students nor parents have to fill out the FAFSA (Free Application for Student Aid) form(s), nor supply the same supplemental documentation. Private loan applications tend to be simpler and the whole process easier. But, fees and interest rates may be higher or lower depending on the individual program.

The most desirable private loans will have no fees and interest rates that are about equal to the prime rate ?1%. The ‘prime rate’ is the rate banks charge one another or their largest, most favored customers. Getting a rate at prime is a good deal, getting a rate at 1% below prime is a great deal. But be sure to check for any fees. As described above, fees can substantially add to the total cost of the loan.

To get that type of loan it’s usually necessary to have a great credit history and/or get a loan with a co-signer who has excellent credit. That situation may or may not apply to you. The only way to know for sure what is available is to dig into the specifics. One great place to start is to look at the table on a site such as http://www.finaid.org/loans/privatestudentloans.phtml

Use a loan calculator, such as that available at http://www.bankrate.com/brm/rate/calc_home.asp to run through some sample scenarios, once you have some figures in hand. Be sure to include all the actual costs over the lifetime of the loan, to get a picture of the real cost.



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