Private student loans are a terrific means of financing your college or university education, whether it be all of it or part of it. Often these loans will cover some of the additional costs you encounter that are not covered by federally funded student loans. A student loan obtained privately can pay for your tuition expenses but it can also be used to pay for your housing expenses, transportation, school fees, books, supplies and miscellaneous costs.
A private student loan is different from a federal government loan because it is obtained through a bank or credit union and it requires a credit check for the person who is the primary borrower. In makes cases a co-signer with good credit is required. Having a co-signer will increase your potential for being approved and it also can help to lower the interest rate on your student loan.
The interest rates on a private student loan are variable and are based on the LIBOR index or Prime plus there is also a margin for borrower credit. The best private loans for students will have interest rates of LIBOR + 2.0 percent or Prime-0.50 percent with no fees connected to them. These loans will be competitive with the federally funded government loan known as the PLUS loan. The downside to this is that these rates are most often only available to borrowers who already have very good credit on their own and also those who can supply a co-signer who is very creditworthy.
It has been estimated that approximately 20 percent of borrowers fall into the category of those who qualify for the absolute best rates. It is worth noting that private loans for student that are attached to the LIBOR index are preferable to those that are pegged to the Prime Lending Rate.
Private Loans versus Federal Loans
As general rule of thumb students should only consider applying for a private loan for their education once they have exhausted all that they can out of federal government loans such as the Stafford loan or the Perkins loan. Private student loans can pick up where federal loans leave off. They offer a viable way to fill in the financial gap for your educational needs. Private loans and the federal Stafford loans have some similarities and some differences. Let us look at those now.
A Free Application for Student Aid (FAFSA) is sometimes required for a private student loan while it is always a requirement for a Stafford loan. The annual borrowing amounts for a private loan are up to the cost of the student’s education while the Stafford loan is capped at grade level as well as the status of the student. The interest rate of the private loan is LIBOR plus or Prime or minus a margin, based on an evaluation of the primary borrower’s credit. The interest rate for a Stafford loan is fixed at 6.8 percent or 6.0 percent for subsidized undergraduate borrowers.
When you are approved for a private student loan the money is sent directly to your school as opposed to being given to you. The same can be said for a Stafford federal government loan. Both loans do not require payment until you have graduated from the post-secondary institution. As well both loans are able to be consolidated.
Private Student Loan Benefits
Private student loans come with their share of benefits. First of all they are flexible in that you can apply for them whenever you require them. There are not specific deadlines as there are with federal loans. For example, federal loans often do not disburse until a month into a school semester while a private loan can pay out in a matter of days after the application has been received and approved by the financial institution.
Federal loans for students are based on need whereas private loans are not. Those who can demonstrate that they have a strong need for financial aid will receive it. These loans are also based on other factors such as student status and grade level. The only federal loan that is not based on financial need is the PLUS loan. For these reasons not every student will qualify for a federal student loan. On the other hand private student loans are not based on need. What this means is that as long as you have good credit and/or a co-signer with good credit you are eligible to apply.
Some private student loan lenders offer discounts or benefits to borrowers when it is time to begin repayment and/or during the repayment term. Examples of these benefits and discounts include an interest rate reduction upon verifying that you have graduated; a reduction in interest rate for setting up auto-debit to repay your loan and a principal reduction on the loan following graduation. Some of the more popular lenders for student loans include Wachovia, Bank of America and Chase