What you need to know about private student loans

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private student loans

private student loansWith the cost of college on the rise, more students are turning to student loans to help them pay for college. Unfortunately, even with the help of federal student loans, there is still a college funding gap for many students. This is especially true for students who attend graduate school. My husband and I both have private student loans obtained during our years in graduate school.

While private student loans can be one way to help close the funding gap between what school costs and what you get from federal loans, it’s important to be aware of some of the pitfalls and realities associated with them. Here are some of the things you should know before you apply for private student loans:

Your Credit Matters More

With federal student loans, credit isn’t such a big deal. Private loans, though, are another matter. “Private loans are almost always based on your credit worthiness,” says Sean Moore, a Certified Financial Planner and the founder of SMART College Funding, a site that focuses on the financial aspects of college planning.

Because credit matters when getting a private student loan, Moore says that there is often variance in loan terms. Additionally, you might not even qualify for a private student loan if your credit is problematic and you don’t have a cosigner with good credit to offset the risk. When my husband got his private student loan, I cosigned for it, since I had income at the time and he was still an undergraduate. However, the fact that I cosigned on his loan meant that I had trouble qualifying for my own private student loan later, and I had to find my own cosigner.

Pay attention to your credit prior to applying for a private student loan, since it will matter in a way it doesn’t for federal student loans.

Watch Out for Loan Fees and Other Costs

“Beware the costs,” warns Moore. Getting a private student loan isn’t just about the higher interest rate (and you will pay a higher rate with a private loan than with a government student loan). “A loan with a lower interest rate may not always be cheaper than a loan with a higher interest rate,” he says. By the time you factor in fees, you might be better off to get a loan with a slightly higher interest rate, but fewer other costs.

Carefully compare loan terms when choosing a private student loan. You have to shop around for the best loan, just as you would for any other loan. You can check with credit unions, online private student lenders, and even P2P sites like Lending Club that specialize in student loans to find the best deal for you.

Private Loan Repayment

“Most private loans require payment immediately,” says Moore. “While some private student lenders allow deferral of payments — but not interest — until graduation, many expect payments to begin almost as soon as the check has cleared.” Reading the fine print and understanding the repayment terms are vital to the process if you don’t want to be taken by surprise.

Moore also points out that private student loans, unlike federal student loans, aren’t likely to be forgiven. “There are numerous ways to have some or all of your federal loans forgiven after graduation,” he says. Teachers and other public servants, if they meet certain requirements, can get a break on their federal student loans. Member of AmeriCorps and the military also have access to programs that pay back some or all of their federal student loans. These types of programs might not apply to private student loans.

Likewise, the government offers special payment plans based on income for those who need the extra help. This isn’t the case with private loans. While you might be able to convince a private student lender to defer some of your payments due to hardship, the terms won’t be as favorable, and you don’t usually see the same income-based options that are available with federal loans.

Should You Get a Private Student Loan?

Before you decide to get a private student loan, make sure you understand the pitfalls that can be associated with these loans. My husband and I are fortunate in that we found good private loans to augment our federal loans during graduate school. And the interest rates, while higher than what we pay on our federal loans, are still quite reasonable. In fact, because our private loans have rates locked in from 2004, the rates are lower than what is charged on current federal loans.

Those getting private student loans today aren’t going to be so lucky, though. Private student loan rates are on the rise — just as federal loan rates are. As a result, it’s better to try to find other ways of paying for college before turning to private loans.

“There are a number of considerations one should take into account before taking on the burden of any student debt, but extra diligence should be exercised if looking at private loans,” Moore says.