Using Private Loans to Fund College
Private education loans are taken out by approximately 14 percent of undergraduate students, according to The Project on Student Debt. Federal Stafford and PLUS loans, although available to most families, have borrowing limits which college costs often exceed. Since government aid is often not adequate to cover all college costs, private loans are often used to fill the gap. Private loans have higher costs than federal loans, and some have interest rates as high as credit cards so they really should be taken out only as a last resort.
Can anyone get a private student loan?
Students and/or parents with a credit score above 650 should be able to get a private loan. It often makes sense for parents to co-sign with their child since students often don’t have enough credit history to obtain a loan on their own. Even if the student qualifies on their own, having a co-signer with a higher credit-score will often result in a lower interest rate and fees.
The amount borrowed cannot be greater than the cost of attendance minus other financial aid. Private education loan lenders will verify that the student is enrolled in an eligible program. Those attending school overseas can also get these loans. Students must be U.S. citizens or permanent residents or they must have a co-signer that meets this requirement.
How does a student find lenders?
School Financial Aid Offices will have a list of preferred lenders that offer private student loans but students don’t need to limit themselves to these lists. Credit Unions and other non-profit institutions may provide lower cost loans. Also, some states have quasi-governmental agencies that provide alternative student loans to residents and those attending school in that state. These loans tend to have better terms than commercial loans and usually offer the same interest rate independent of a student’s credit history. Massachusetts, Maine, Rhode Island and Michigan are some of the states that have this type of agency.
Another source for students attending for-profit schools, may be the school itself. However, students should be careful to make sure the terms of the loan are comparable to other available sources.
How does a student know which is the best student loan option?
In comparing loan options, students should consider a number of factors:
- Fees – these can range from zero percent to six percent. Some lenders will have lower fees but offset this with higher interest rates.
- Interest Rate – private loans usually have variable interest rates that change with either the Prime Lending Rate or LIBOR. Watch out for teaser rates that will jump up once adjusted.
- Repayment period – A longer repayment period will result in a lower APR but more interest paid in total.
- Co-signer release – Some lenders will release the co-signer from obligation after a certain number of consecutive payments have been made on time.
The College Board provides an online calculator to compare loans taking into consideration the interest rate, fees and term. However, since most private loans have variable interest rates, the usefulness of this tool may be somewhat limited.
Quick Private Loan Tips
- Always reach the maximum on Stafford and PLUS loans first – Two-thirds of private loan borrowers do not take full advantage of these lower cost federal loans.
- Don’t borrow more than you can pay back – Total debt at graduation should be no more than a borrower’s first year salary.
- Having a co-signer may result in better loan terms – A typical undergraduate student doesn’t have an established credit history whereas their parents or other relative may have a good credit score.
- Non-profit lenders may offer better terms – They are more likely to offer fixed rates and lower fees.
Resources
Sallie Mae Student Loan website – A source of private loans and other student loans.
College Board’s “What You Should Know About Credit Reports”.
College Board’s loan comparison tool.
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