The Essentials of Private Student Loans
When it comes to covering education costs, some students may choose to utilize private student loans. While these loans typically have higher interest rates and more rigid repayment plans, students can use these loans smartly to cover gaps in their financial aid packages. Students should exhaust all scholarship, grant and federal financial aid programs before using private student loans. If borrowing from a private lender is necessary, make sure you understand all the terms and agreements before signing. Some important factors to consider are interest rates, fees, co-signers and repayment.
Private lenders will determine your interest rate based on your credit score. Some will have a variable interest rate throughout the life of the loan that changes based on your credit score, an index such as LIBO OR PRIME, or other factors. These rates can be calculated as often as monthly, which means the payment could be subject to change 12 times in a year. Private loans will also accumulate interest the entire time while you are in school, so consider paying it before you enter repayment so it will not get consolidated with the principal amount of your loan.
Another drawback is that private loans may charge additional fees for disbursement, origination, deferment and more. Fees can either be added to the loan and must be paid back later, or will be deducted from the loan amount before it’s applied to your education expenses. Some private lenders also charge a prepayment penalty to borrowers that pay off their loans early.
Adding a co-signer could be the difference between getting approved for a loan or not. It will also most likely result in better loan terms, such as a lower interest rate, as long as your co-signer has a higher credit score than you. However, make sure to read the fine print. Some private loans require early repayment or automatically go into default if the co-signer passes away before the loan is fully repaid. Being a co-signer is a huge responsibility. The co-signer is equally responsible for the debt, any payments the borrower doesn’t pay the co-signer is responsible for. Also the loan account will appear on the co-signer’s credit report and will be negatively impacted by any late or missed payments.
Private lenders aren’t required to give all the flexible repayment and loan forgiveness options as federal loans. Make sure you are aware of what repayment options are available in case you are not able to find a job right away, have a lower income than expected or experience another economic hardship. When paying more than the minimum monthly payment, be sure to contact your lender to specify how you want that additional amount applied, either to the interest or principal amount. By paying down the principal, your loan will accrue less interest overtime.
Carefully consider and research all private lenders, and remember to only use private student loans as a last resort!