Private Student Loans – Should I Seek One?

Private student loans should be the last stop in trying to get the money to cover your college bills because they will cost you far more in the end than most other forms of financing.

Unfortunately for college students, financial aid packages from many schools do not cover the entire cost of education. Based on your FAFSA (Free Application for Federal Student Aid), schools will determine if you are eligible for Federal grants and loans (Stafford Loans, Perkins Loans, Pell Grants, Federal Work Study, etc.) and these will be added to your package first.

Eligibility for grants and scholarships from some states will also be determined by the FAFSA. You have the choice to accept or reject any of the grants and loans in your package, though acceptance is usually called for, since the interest rates on these government loans is usually much cheaper than any private student loans you will find.

Once you have added up all the scholarships, grants and loans, you may find that you still need an additional sum to get through the year. At this point a private student loan may be your only option. Also known as alternative student loans, they are available from many private companies.

One major difference between the private and the government loans are that the private loans depend on your credit rating. The better your rating, the lower the interest rate you can expect to receive. The better your rating, the lower the loan fee you can expect to pay to get the loan. If you have a poor credit score or none at all, then you may still be able to secure a good rate by having a creditworthy cosigner.

You will need to be certain of the terms of your loan, since there are many different terms available depending on the lender. Repayment may start immediately, or be deferred until graduation. Even if deferment is allowed, interest begins accumulating immediately, so the balance will be increasing until you graduate and start making payments. Some lenders will allow you to pay interest only while you are still in school, which will help to keep the payments down later.

If you do have a cosigner, they need to be aware of the possible consequences of their involvement. If you are unable to make your payments, they may be required to make the payments themselves, since they have taken on the responsibility by cosigning. It could also affect their ability to get a loan while the private student loan is still active. The reason is that their debt to income ratio will be higher, since your loan shows also on their credit report.

In conclusion, if there are other alternatives available, private student loans are not the way to go. If not, then a good credit rating or a cosigner will at least help you to get the best possible rates and terms. Contact several lenders and compare the interest rates, as well as the other payment conditions.