Private Student Loans

Private college loans, sometimes called alternative loans, are taken out through a private lender like a bank for example.

Private college loans can help students and their families meet most financial shortfalls that may occur when funding college or school. Unlike Government loans private school loans require that you have a good credit rating or that a co-signer has a high rating and without this you are unlikely to find private funding of this sort.

The diagram on the left depicts how a typical student might fund college, just to give you some idea of the scale of one source of funding against another.

Please Remember…

It is most important to remember that you should only be considering private school loans if you have exhausted other sources of finance, for instance the Federal Direct Stafford Loan, and maxed them out. This is so because the interest rates are much higher on private loans.

It may also be worth filling out the Free Application for Federal Student Aid (FAFSA) to see if you will qualify for any additional money from student grants and scholarships.

Interest rates

The interest rates for alternative student loans are not nearly as good as any of the Federal Direct loans, especially the Perkins loan so these should be looked into first.

You should be aware that even if a loan from a private lender has a low interest rate but has high fees associated with the repayment, it could work out to be more expensive over the term of the loan than one with a higher interest rate. Basically don’t try and compare apples and bananas – make sure you are looking at the same or very similar figures before making an informed decision.

Some of the best private student loans will have LIBOR + 2.8% or PRIME + 0% interest rates which would bring them nearly into the same league as the Federal PLUS loans. Although some lenders may occasionally advertise these rates in reality it is much more difficult to make them materialize. The best advertised interest rates are saved for students that have squeaky clean credit histories and are using a cosigner with excellent credit.

One particular trap to watch out for is that lenders may offer lower rates or special introductory offers during in-school or grace periods and then hike up the interest and fees as soon as the repayment is due to start. This shouldn’t be a deal breaker but it’s something to keep a mental note of when comparing prices.

The bottom line is that most students are going to need the extra money that private student loans can provide. They are more flexible, available and come in a wider range of packages and options than their Federal counterparts.

The other side of the coin is that they are more expensive. You could say that you get what you pay for but this is only true if you are smart and shop around to compare the interest rates, fees and terms and conditions of the lenders you are considering.

Take your time and research, research, research.