Advice on Private Student Loans
Private student loans are more expensive and risky than federal loans, and are universally agreed to be a last resort.
Private loans have higher interest rates than federal loans that are variable instead of fixed, and lack the borrower protections of federal loans. You should exhaust her federal options (including Parent PLUS loans), before resorting to private loans.
If you do take the private loan route, here’s some tips to get the most bang for your buck.
Limit the number of private loan applications to four at the most, since each application results in a reduction in your credit rating. It is not possible to tell how much the loan will cost since very few lenders provide up-front pricing, and the best advertised rate has no correlation with the actual rates you will get (unless you happen to have a credit rating in the 800s). So apply for a variety of private student loans, one offered by a bank, one by a non-bank specialty lender, and one by the state loan agency in your home state as well as the state in which you are going to school. This stands the best chance of getting you a loan with among the better loan terms.
Colleges can make recommendations about lenders for both private and federal loans. They are often required to have more than one preferred lender, and many also have to share their criteria for choosing preferred lenders. Financial aid offices may be able to negotiate better deals for their students than a parent could, so it is worth checking out these recommendations.
Here are some questions that you should ask when choosing a private college loan:
- What is the lowest interest rate and fee combination that you offer? How can I get that rate? Is the rate only for a limited period (an introductory rate), or for the duration of the loan?
- If the interest rate you are offering is variable, is there a limit on how high the rate can go? How often is the interest rate adjusted, and how is it determined?
- What rate can I get on a fixed-rate loan?
- How long will I be repaying the loan? Is there any penalty for paying off the loan early?
- When do I have to start making payments?
How long can I defer payments while I’m in school? What if I go to graduate school after my bachelor’s degree? How often do you capitalize the interest? If I do not make payments while in school, how much will I owe when I do start making payments?
Will I lose my on-time-payment discount with just one late payment or if I ask for a change in the payment schedule? What proportion of your borrowers actually get the discounts you offer?
Are your discounts guaranteed, or are they subject to change later?
If I have difficulty making payments (“economic hardship”), do you allow me to defer or reduce my payments temporarily? Under what circumstances, and for how long?
How much can I borrow without reducing my eligibility for federal, state, or institutional aid?
This entry was posted on Thursday, June 19th, 2008 at 2:11 pm and is filed under College Loans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
