Do You Have The Right Private Student Loan?
College private student loans are college loans that are not guaranteed by a government agency and are made directly to the college student by a bank or finance institution. Advocates of college private student loans suggest that they combine the best of all the different government college student loans into one. They will generally offer a higher loan limits than the federal student loans and will ensure the college student is not left with a budget gap. However, unlike a federal parent loan, they will generally offer a grace period with no payments due until after graduation. This grace period can range from 12 months after graduation, although most private lenders will offer six months.
College Private Student Loan Types
Private student loans will generally come in two types: school channel and direct to consumer channel.
School channel private student loans offer borrowers a lower interest rates but will generally take longer to process. School channel private student loans are certified by the college or university, which means the school will sign off on the borrowing amount, and the funds for school channel private student loans will be disbursed directly to the school.
Direct to consumer private student loans are not certified by a college or university; schools will not interact with a direct to consumer private student loan at all. The college student will simply supply enrollment verification to the lender, and then the loan proceeds are disbursed directly to the college student. While direct to consumer private student loans generally carry higher interest rates than school channel student loans, they will allow families to get access to funds very quickly. In some cases, it may only take a matter of days. Some will argue that this convenience is offset by the risk of students over borrowing and the use of funds for inappropriate purposes, since there is no third party certification that the amount of the private student loan is appropriate for the education finance needs of the college student in question.
Direct to consumer private student loans are one of the fastest growing segments of education finance and under legislative scrutiny due to the lack of school certification. College student loan providers range from large educational finance companies to specialty companies that will focus exclusively on this niche. Such private student loans will often be distinguished by the fact that no FAFSA is required or funds will be disbursed directly to you.
College Private Student Loan Rates And Interest
College private student loans will typically have a variable interest rates while the federal college student loans will have a fixed rate. Consumers should be aware that some private student loans require substantial up front origination fees. These fees raise the cost of the borrower and reduce the amount of money available for any educational purposes.
Most private student loan programs will be tied to one or more financial indexes, such as the Wall Street Journal Prime rate or the BBA LIBOR rate, plus any overhead charge. Because private student loans will be based on the credit history of the applicant, the overhead charge will probably vary. College students and families with excellent credit will most likely receive lower rates as well as a smaller loan origination fee than those with less than perfect credit. Any monies paid toward interest can now be tax deductible. However, many lenders will rarely give complete details of the terms of the college private student loan until after the student has submitted an application, in part because this will prevent comparisons based on cost. For example, many banks and financial institutions will only advertise the lowest interest rate they charge (for good credit borrowers). Borrowers with not so good credit can expect interest rates that can be as much as 6% higher, loan fees that can be as much as 9% higher, and student loan limits that are two-thirds lower than the advertised limits.