Private Student Loans: Some Basic Information

 

Many college students out there, even after exhausting their eligibility for federal loans, federal grants, state grants, and institutional based scholarships, still find themselves owing a balance to their college or university. There a few different ways those students meet this gap, where they are fully able to pay for tuition, room and board, fees, and have some bucks left over to pay for books. Some students and families use a payment plan, where an institution allows students to pay a certain amount out of pocket towards their balance over a specific period, usually 6-10 months. If this interests you, contact your financial aid office to see if the school participates in such a plan. Other families utilize a Federal PLUS loan, which is a federal loan taken out by a parent on behalf of an undergraduate dependent student. Still, many students find themselves having to take out a Private Student Loan, a loan taken out through a private lender by a student for educational purposes. There are things you need to know though before you go this route. 

Cosigners

If you are a younger, traditional student with no real established credit, the lender is going to require a cosigner for your loan. This can be anyone, a parent, relative, or a family friend. Although in most cases you're not going to have people knocking down your door to be your cosigner, it possible it is a good idea to select a cosigner with a solid credit history. The better your cosigner's credit, the better interest rate and fee structure you may qualify for. 

Another thing to keep in mind is you must be fully aware, and your cosigner should as well, that a cosigner is equally liable for the loan as the student borrower. If the student borrower defaults on the loan while in repayment, it will wreck the credit of not only the borrower but the cosigner as well. That is why you may sometimes hear lenders or financial aid officers refer to cosigners as "co-borrowers." 

Finally, inquire to your lender is they offer any sort of cosigner release program, and if they do, what are the exact terms of the program?  A cosigner release program is when a cosigner is released from liability of the loan after certain repayment parameters have been met. For example, a lender may offer to release a cosigner from loan liability once the loan is in repayment and the borrower makes 48 consecutive on-time payments. 

Interest Rates

Interest rates are one of the most important elements you need to be aware of when taking out a private loan. First and foremost, know what your interest rate is and understand it prior to fully committing to a private loan. Even if you qualify for a private loan, and it is a high interest rate loan you need to ask yourself if it's really worth the amount you are going to pay over the loan run. Have you explored all of your other options? 

Secondly, most private student lenders today offer only a variable rate and not a fixed rate. There may be a few fixed rate private loans out there, but they are very few and they usually have very specific qualifications such as residency or participation in a specific group or employer. When looking at a private loan interest rate and what you have qualified for, you need to look at the index + margin. An index is what the rate is based off, for example the U.S Prime Rate or the LIBOR (London Interbanking Offered Rate), and your margin is what you have qualified for. So let's say you apply for a private loan and based off of credit you qualify for LIBOR + 2.55%. Your current interest rate then would be whatever the LIBOR is plus2.55%. If the LIBOR is 3%, your current rate is then 5.55%. Variable indexes usually change either every 90 days or every 30 days, so depending on what the markets do, your rate may fluctuate heavily throughout the life of the loan. Contact your lender or even your financial aid office if you have concerns about this or require further explanation. 

In terms of rate caps they generally sit around 25%. It is widely agreed though that rates for student loans will rarely if ever go this high, however, in recent years it has been commonplace to see students and cosigners with below par but approvable credit get approved for loans starting out at 15-16%. 

Repayment Options

When looking at repayment options, be aware of what repayment options the lender gives you and do they have one that better meets your expectations. For example, some lenders may require you to pay interest while you are attending classes. From a financial standpoint, this is a good thing as it lessens the cost of the loan for you over a period of time. However, you need to ask yourself if you are in a position to be able to pay interest while you are in school? If you are not working and you have a monthly bill of $100, that might be a difficult payment for you to meet if you do not have a job.

Other things to look at are what kind of options does the lender give you for repayment after school? A long term payment plan of 20 years will have lower monthly payments, but keep in mind you will pay more in interest the longer you take to pay the loan back. In the end, select the plan that best fits your financial situation. You should also have the option to change this plan later or make additional payments if you want to at no penalty. 

Finally, be aware if the lender offers any deferment or forbearance options while you are in repayment. These are used in the event you cannot make payments due to financial woes or you return to school. 

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