A Guide to Private Student Loans

Private student loans are the last recourse the student utilizes when other forms of borrowing, grants and scholarships still leave a shortfall between the expense of college and available money. Funding college is almost prohibitively expensive for many. The first port of call for students is federal student loans available through the FAFSA application process, yet sometimes these just aren’t enough to cover all the costs. Private student loans are often needed  when all other sources of funding have been exhausted.

Private or alternative student loans, are not ideal, but are often a necessity. They are something the student should give great consideration to and shop around for carefully. Unlike federal loans which have fixed interest rates and are fee free, private loans can be much more costly to service. One of the major drawbacks is the student must start to repay the interest whilst still in college, instead of deferring these payments until after graduation, so the sums need to be done to allow for interest repayments during college days.

Many states have run their own private loan system, in conjunction with a state lender, and advertise preferential deals for students due to the subsidies they received from the government. However the subsidies have now been stopped and private state lenders are no longer an option for the student to obtain federal student loans. They have also begun to reduce the number of private student loans they offer as without the subsidies they are no longer viable, thus students will be left with less choice between private student loans. Lending criteria has been tightened due to the high level of student loan defaults, but at the same time there is more federal funding now available at advantageous rates.

Things to be very aware of with private loans are the interest rates and the fees. Never take on a loan which has any type of fee attached for repaying it early. Never pay a fee for applying for a loan which may well be rejected and lose you the fee. If there are any fees attached to servicing the loan assess if they are worth the saving in other areas, before committing yourself.

Usually interest rates on private student loans are variable, which means they are liable to change at any time with market rates, and thus make it difficult to budget monthly expenses with any degree of accuracy. If you have the option of a fixed rate, take advice from an unbiased third party, such as your bank manager, to see which rates look like the best long term option. Most loans are advertised with variable rates which range from low to high and students will not know which interest rate they qualify for until approved for a loan, thus making it expedient to apply to several lenders to compare loan offers once approved.

The vast majority of students will have no credit history of their own and thus no private lender is going to advance a loan to them direct, and commonly expect any such loan to be endorsed by a third party co-signer. If someone is willing to endorse a private loan on the student’s behalf they are putting a great deal of trust in the student to repay the loan in a timely fashion, and risking their own credit score at the same time. A guarantor needs to understand completely the commitment they are undertaking, and ensure there is an opt out clause after payments have been met in a satisfactory way for a set period of time. It is wise for a co-signer to be aware of the terms of release when they co-sign a student loan.

As with federal student loans, private student loans are non dischargeable and should only be taken out for necessary, rather than additional expenses. Although the prospect of being reliant on them at such a young age can be a daunting one, the student is often left with no other choice. The best advice is to compare as many as you can and take advice from the college financial office and not just sign up for the first loan on offer.