What You Need to Know About Student Loans
As the cost of college rises rapidly, and federal college student loan limits fail to keep pace, the private student loan business is in the process of growing very quickly. These private college student loans are used to fill the gap between available financial aid, and what students and families can afford to pay out of pocket for college expenses. However, these private college student loans lack the more affordable, fixed interest rates, and flexible repayment options that financial aid loans have. Prospective borrowers should exhaust all federal grant and college student loan options (including PLUS loans) before considering a private college student loan.
Banks and other financial or lending institutions make private college student loans without any financial backing from the federal government. Interest accrues on all private student loans from the time they are disbursed, although interest rates can sometimes be deferred and capitalized when repayment does begin. There are many different types of private student loans, each program with its own rules and requirements. Private college student loans are also called private label or alternative student loans, and are often provided by the same bank institutions or lenders that also provide federal FFEL student loans. Because the government does not subsidize private college student loans, the rates and terms are not regulated as they are for financial aid loans, which make private student loans a little more risky and more expensive.
Loan Rates, Fees, and Loan Limits
Private student loan terms and conditions, including interest rates and fees, are usually based on your credit history or a co-signer’s credit history. This means that low income students or those with negative credit histories will likely receive college student loans that are more expensive, meaning the interest rate will be higher as will the fees. Like government student loans, private student loans are supposed to be used only to finance postsecondary education (including books, transportation, and room and board). Check your school of choices estimated cost of attendance and consult with the financial aid office before deciding on a private student loan and amount.
Private student loan lenders may pressure or even require you to get a co-signer. It is important to remember, if you qualify on your own they can not force you to obtain a co-signer. A co-signer can be a relative, friend or someone else who agrees to be responsible for your student loan. Co-signers must understand that they will become responsible for paying back the student loan just as if they had received the money themselves.
There are many important differences between government student loans and private student loans. If you take out a private student loan, you will not be eligible for the same types of discharge options available for federal student loans. The same is true for deferment and forbearances. Always read your student loan contract very carefully to learn about your private student loan’s particular terms, conditions, benefits, interest rates, fees, and penalties. Private student loan lenders do have to honor any promises they make about terms and benefits, as long as it is in writing.