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Private Student
Loans
Many of the common Federal student loan programs require no
credit check and provide substantial sums for financial aid.
Unsubsidized loans, in which any interest accrued while the
student is in school making satisfactory progress, are among
the most desirable.
But these programs are need based and often carry other
criteria that make it difficult to qualify. Even when students
(and parents) do qualify, the loans only cover a portion of the
total cost of education, in many cases. When students and their
parents find themselves in that situation, they can turn to
private loans to make up the difference.
Private loans, too, have pros and cons, however. A credit check
is almost universally required. For those with a good credit
history that's no problem. But 'good' is a relative term and if
it isn't good enough, borrowers will find themselves paying
higher than optimal interest rates.
Beyond the stated interest rate, there are other financial
implications of private loans. Fees are often tacked on (or,
rather taken off) nominal loan amounts. A relatively modest
loan of $4,000 may easily have 4% in fees applied prior to
distribution. That means $160 of the total is never seen by the
borrower, but must be repaid. As a rough guide, every 3% of
fees is equivalent to an additional 1% on top of the stated
interest rate.
Private loans do have certain advantages, however.
The obvious one was alluded to above: the funds are available.
Private lenders exist to make a profit on the interest and fees
they charge. They have an interest in making money available to
borrowers. As a consequence, they will work very hard to ensure
that every applicant qualifies. Federal lenders, on the other
hand, have an inflexible set of criteria and there is typically
no real appeal if your application is denied.
Not having to deal with that impersonal, often illogical,
bureaucracy is another advantage of private loans. Lenders
maintain customer service departments that, though
understaffed, exist to answer questions so that customers can
get answers. Federal loan programs typically have contacts and
help available as well. But the answers one gets are hit or
miss in terms of quality.
But many other practical considerations apply that make private
loans desirable.
Neither students nor parents have to fill out the FAFSA (Free
Application for Student Aid) form(s), nor supply the same
supplemental documentation. Private loan applications tend to
be simpler and the whole process easier. But, fees and interest
rates may be higher or lower depending on the individual
program.
The most desirable private loans will have no fees and interest
rates that are about equal to the prime rate – 1%. The 'prime
rate' is the rate banks charge one another or their largest,
most favored customers. Getting a rate at prime is a good deal,
getting a rate at 1% below prime is a great deal. But be sure
to check for any fees. As described above, fees can
substantially add to the total cost of the loan.
To get that type of loan it's usually necessary to have a great
credit history and/or get a loan with a co-signer who has
excellent credit. That situation may or may not apply to you.
The only way to know for sure what is available is to dig into
the specifics. One great place to start is to look at the table
on a site such as
http://www.finaid.org/loans/privatestudentloans.phtml
Use a loan calculator, such as that available
here to run through some sample scenarios, once you
have some figures in hand. Be sure to include all the actual
costs over the lifetime of the loan, to get a picture of the
real cost.
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