Private Student Loans: The Basics

Post By: COYD Staff

private student loans collegeFirst of all, what are private student loans? A private student loan, an “alternative loan”, is a loan which comes from private institutions such as banks and credit unions and is not guaranteed by the government. The rate of interest, along with their terms and conditions, are set by the lender. Below are a few things you need to consider when dealing with private student loans:

1. Use private student loans as a last resort

Before you even look into private student loans, make sure to exhaust your eligibility for federal student loans, apply for scholarships, and ask your parents about a federal parent loan. Federal loans offer better repayment and forgiveness options as well as better interest rates that are fixed. Private student loans usually have variable interest rates which are fixed to an index, such as LIBOR or PRIME, plus a margin. You should only use private loans to top off what you receive from the government and scholarships.

2. Use a credit-worthy co-signer

Private student loans are based on your credit score. Applying with a co-signer with a good credit score can give you a better interest rate as well as lower fees.

3. Know the true cost of the loan

The fees charged by lenders can increase the cost of the loan. A loan with a low interest rate and high fees can cost more than a loan with a higher interest rate and no fees. Generally, 3% to 4% in fees is about the same as a 1% higher interest rate.

4. LIBOR preferred over Prime Lending Rate

Generally, find the loans that are pegged to the LIBOR index over loans pegged to the Prime Lending Rate. Loans pegged to LIBOR index are less expensive.

5. Ask repayment questions

When does repayment begin? Try to find a loan which will allow you to defer payments while you’re still in school.
Are there any prepayment penalties? There usually isn’t prepayment penalties but make sure this is the case.
Are there any forbearance or deferment benefits?

6. Do not borrow more than you need

Make a line item budget. Do not just ballpark estimate your potential expenses. Remember, the money you are borrowing is not free. You want to minimize this total amount as much as possible. Do not use these loans to buy “luxury items” like cars, home entertainment systems…etc. These are NOT school necessities.

Next post we’ll discuss other types of alternative loans…


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