Private Student Loans

Financing a student’s higher education can be difficult. There are several loan and grant financing programs administered by the federal government, but such programs often do not cover all costs or the student is unable to qualify for them. Many parents and students are looking into private student loans as a way to help fund a secondary education.

Before turning to private student loans, a FAFSA (Free Application for Federal Student Aid) should be submitted to ensure that all federal avenues have been exhausted. Federal programs offer better interest rates and more flexible payment plans than private loans.

If, after applying for all federal programs available, a student requires more money, there are private loans that may fill the gap. However, careful research is required before agreeing to a private student loan. Loan interest rates, fees and repayment plans vary widely between various private student loans offered by financial institutions.

Below are some facts to consider when comparing loan offers:

1. Credit unions are non-profit and often offer lower interest rates and fees than banks.

2. Credit history and ratings are used to assign interest rates. A co-signor may be required if the applicant cannot pass the credit check. Remember that advertised loan rates are generally the lowest offered to borrowers with the highest credit ratings and will be adjusted according to the applicant’s credit rating.

3. Look for low interest rates, but high fees can actually cost more in the long run than a higher interest, lower fee loan. 3-4% in fees equals approximately a 1% higher interest rate.

4. Look for private student loans based on the following criteria with few or no fees: LIBOR (3 month average of the London Interbank Offered Rate) + 2.0% or PRIME (Prime Lending Rate published in the Wall Street Journal ) + 1.0%. Loans based on the LIBOR are generally more economical.

5. Many private loans are less restrictive than federal school loan programs. Some allow for purchase of a computer, paying for school costs already incurred and many are free from borrowing caps.

6. Some lenders will require a school approval certification before loan approval.

7. As with any loan, read and understand all terms and repayment requirements before signing the loan agreement.

Students make use of federal loan and grant programs more often than private loans, however, private student loans are growing at a much faster pace. Higher costs of education, borrowing caps on federal loan programs and restrictions on federal loan money all make private student loans an option for students and parents seeking ways to pay for school.