Private student loans are privately funded education loans offered by a private lender, bank, or other private financial institution. College students can use private student loans to cover educational expenses that are not covered by their federal student loans and free money options for college, such as scholarships and grants. Most financial aid experts recommend that students exhaust all of their scholarship and federal financial aid options before applying for private student loans, since private student loans often come with higher interest rates and less flexible repayment options (compared to federal student loans).
Private student loans are typically more expensive than federal student loans for a few reasons:
1. The government does not set the interest rates, loan limits, terms, and/or conditions of private student loans, banks and lenders do. It is because of this that private student loans can typically carry higher variable interest rates, and do not offer as many repayment options compared to federal student loans.
2. Federal student loans are based upon a borrowers financial need, while private student loans are based upon a borrowers credit profile. Borrowers without good credit, or borrowers with little credit history will likely have trouble qualifying for a private student loan at a good interest rate, if they can even qualify for the loan at all.
3. Private student loans, are not be eligible for the same types of discharge, repayment, deferment, and forbearance options that are available for federal student loans.
The interest rates for private student loans will typically be variable interest rates, that depend on the loan type, lender, and the borrowers credit score. Generally the higher your FICO score, the better off you are in terms of private student loans and their corresponding interest rates. Since the interest rates on private student loans are based on your credit history or a cosigner’s credit history, borrowers with bad credit or no credit may not even qualify for a private student loan. The interest on all private student loans will either begin to accrue from the time they are disbursed OR the interest costs will be deferred and capitalized (added to your principal balance) once repayment begins.
A borrowers credit, among other factors, will determine if a borrower can qualify for a private student loan, and at what amount. It is recommended that students never take out more in private student loans than they absolutely need.
The only way that an individual will likely qualify for a private student loan is if they have a positive and established credit history. Though private student loan lenders take a number of different factors into consideration when evaluating a borrowers eligibility, the borrowers credit profile is a main factor. The reason that a potential borrowers credit profile plays such a large role in the private student loan eligibility process, is because it provides the lender with a reliable assessment of if the individual is a good lending risk or not. Every private student loan lender is different, offering different loan products, with different qualification factors, so the only way to know for certain if you can qualify for a private student loan, is to apply.
The 2009 Truth In Lending Act requires private lenders to provide clear, complete information on loan terms and conditions before a borrower applies. Prior to the new Application and Solicitation Disclosure forms, lenders were allowed to advertise interest rates and fees available to those with nearly perfect credit scores, even though the majority of those applying for the loan would not qualify for those rates and fees. Lenders are now be required to provide borrowers with upfront disclosures, outlining the full range of terms and fees which should make it easier for borrowers to compare different loans. Some factors you will want to consider when comparing private student loans:
1. Does the loan have a fixed or variable interest rate?
2. Is there a cap/limit on how high a variable interest rate may climb during the life of the loan (most do not have a cap)?
3. How long is the loan repayment period, and is there any penalty for paying off the loan early?
4. If any discounts come with the loan, find out if the discounts are guaranteed or if they can be subject to change at a later date?
5. What are my repayment options, should I have difficulty making my payments?
Unlike with federal student loans, there is no standard deadline for private student loan applications. You do have the flexibility to apply for these loans whenever you would like. Since private student loan rates, terms and requirements will differ from lender to lender, you must contact the private student loan lender for all specific questions.
You can get private student loans from your school or from private financial institutions. For a list of private student loan leaders click here.
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