Private Student Loans

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It would be great if college was free or affordable enough for everyone to attend without the need to borrow money.  Even with scholarships, federal student loans and Pell Grants many students still need more money to complete their education.  This is where private student loans come in.  A private student loan is a loan to complete your education that is not underwritten or guaranteed.  Private student loans are provided by for profit institutions such as banks.  For some students these private student loans are critical because they do not qualify for other forms of financial aid due to income level, too many credits or a previous degree.  In such cases, the private student loan can make the difference in whether a student completes their degree or quits in frustration.

Problems with Private Student Loans

Unlike federal student loans, private student loans only care about your ability to pay them back and your credit history.  Many students entering college may not have a credit history or worse a poor one.  Also, some may not even have an income. Such problems will not necessarily disqualify you from the loan, but may result in higher interest payments.  It is important to compare the loans that are available. One way around higher interest payments is to have a co-signer.  This could be a parent or any individual with a good credit history and the means to payoff the loan if you default.  This is a lot to ask of a person because they will go after the co-signer if you fail to pay for any reason.

Comparing Private Student Loans

As a student it beheves you to compare the lending options available to you. Your college may recommend certain lenders and that may be a good place to start, but do not limit yourself to those choices. The better the loan terms the less money you will need to payback in the end. You need to read the fine print on any private student loans you take out. Things to compare include origination fees, interest rates and payment options. 

An origination fee is a set amount of money that is charged upfront when processing the loan.  Lenders say it is to cover the costs of paperwork and cutting the check, but I think it simply is another way to make money.  The origination fee is generally a percentage of the total amount borrowed and is added to you principal balance.  Some times lenders will wave the origination fee as a promotion.

The interest rate is the cost of owing the money.  It is expressed as a percentage that is determined annually and charged per month.  The higher the interest rate the larger the monthly payment and/or longer the repayment term.  The lower the interest rate the cheaper the loan.  Students need to compare lenders and determine which one is offering the best deal.  The interest rate must be disclosed to the borrower before acceptance of the loan and is part of the lending papers.

Repayment options are also important to students.  Many leaders offer different repayment plans to the student borrower.  Common options include:  interest only payments, start full payments immediately, and deferred payments until after graduation. Starting payments immediately will save you money in the long run, but would be impractical for the student with inadequate income.  The idea behind deferring until graduation is that your degree will get you a great job and repayment will be easier.