What You Need to Know About Private Student Loans
When most people hear “student loans,” they’re thinking of federal student loans that are issued by the Department of Education and managed by a variety of loan servicers. But in addition to these widely known federal student loans, there are also private student loans. These are loans issued by banks or other financial institutions directly to borrowers to pursue a higher education. Let’s take a look at what you need to know about these loans.
Who can apply for private student loans?
Anyone who needs funds to pay for tuition and higher education costs can apply for them. However, unlike federal student loans, which don’t require a credit check, your credit determines the loan amount and interest rates of private student loans. The better your credit, the more you can borrow and the lower your rates will be.
Because many young people applying for private student loans may have a minimal credit history, their loans will require a co-signer (usually a parent). This means the co-signer shares the responsibility for repaying the loan if the borrower is unable to for any reason.
Can I have private and federal student loans?
Most borrowers who apply for private student loans use them to make up the difference when they’ve exhausted the amount of federal student loans they can borrow. You’ll want to borrow only the minimum amount you’ll need to pay for tuition and expenses. Don’t view private student loans as free money. The time to pay them back will be here much sooner than you think.
What if I can’t pay them back?
One of the primary drawbacks of private student loans is that they don’t offer the range of repayment and forgiveness programs that are available for federal loans. These government-backed programs can help federal student loan borrowers avoid defaulting on their loan payments and harming their credit. Private student loans offer less flexibility. If loans have a co-signer, that person will be responsible for taking over payments if the borrower is unable to pay.
What should I consider before taking out student loans?
When borrowing money to pursue a college education, many people over-estimate how much they will earn after graduating. It’s often much less than they’re anticipating. Even high-paying careers aren’t necessarily lucrative from the start; you have to work up to making the higher end of the salary scale. Federal student loans take this into account by offering payment plans determined by borrowers’ earnings. Private student loans don’t have these options and high loan payments begin shortly after graduation, regardless of what a borrower earns.
Before taking out any student loans — federal or private — research all other possible options including scholarships, grants and work study programs. Also consider less expensive alternatives to a four-year degree, such as attending community college or a trade school.
What else should I know?
As with other financial products on the open market, the terms, conditions and interest rates of private student loans vary from lender-to-lender. Do your research and ask as many questions as you need to feel comfortable before agreeing to anything in writing.
It’s also important to note that federal student loans offer up to a 6-month grace period after graduating or leaving school before borrowers are expected to make payments. Private student loans, on the other hand, rarely offer any grace period. You’ll start making payments as soon as you graduate or leave school.