As April winds down, and May approaches, many of our thoughts turn toward summer vacations. But, if you have a teen in High School you are probably thinking about college, and how to pay for it!
Private loans are the fastest-growing sector of the multibillion-dollar student loan industry. About 15% of the student debt held by the graduating class of 2017 was private. Private Student Loans are also known as Alternative Education Loans.
Private student loans are those student loans other than Federal Student Loans. Private student loans are loans that are disbursed by a bank or other private lender rather than the Federal Government.
Generally speaking, private student loans should not be considered a substitute for or an alternative to Federal Student Loans, but an adjunct to them. Private student loans should only be applied for once you have reached the maximum available Federal Stafford Loans and more financial aid is required.
Unlike federal student loans, the federal government doesn’t guarantee private loans. While guaranteed student loans carry fixed rates, there are no limits on the interest rates and fees banks and other private student loan lenders can charge.
Unlike Federal Stafford Loans that are available to all students regardless of credit history, private student loans, like all private loans, be it a car loan or a mortgage, subject the applicant to a credit check. Those with no credit history or a poor credit score can expect to pay higher interest rates for a private student loan.
Private Student Loans Are Increasing
Every year for the last 10, the total dollar amount borrowed as private student loans has been increasing.
There are several reasons for this increase in private student loan borrowing. The primary reason for the increase in private student loans is the limits put on Federal Loans coupled with rising tuition costs.
The total amount undergraduates can borrow through the federal Stafford loan program is $23,000, an amount that has not increased since 1992. During that same period of time, the average annual cost of college tuition and room and board at a typical four-year college has risen 135%. Private student loans help bridge these gaps.
Private student loans have also become increasingly popular options for low-income families as the levels of the most popular Federal Financial Aid programs for low-income families; Pell Grants and Perkins loans have also failed l to keep pace with rising tuition costs.
How Do Private Student Loans Differ From Federal Loans?
Private student loans generally cost more than the Federal Student Loan Programs and have variable interest rates. Private student loans still have significantly lower interest rates and more generous payback periods than other alternatives such as Credit Cards. Private student loans do not have the limited funds of Federal Loans.
Unlike Federal Loans which are open to anybody, Private Student Loans are based on your credit score and or the credit scores of your cosigner if you have one. Generally, credit scores less than 650 will result in a rejected application for a private student loan.
It is usually recommended that you do use a cosigner for the private student loan even if you feel you qualify or can make the payments on your own. Having a cosigner reduces the risk for the lender and will usually result in a lower interest rate.
Like most loan products today private student loans are big business and a competitive one at that. It pays for the consumer to shop around for the best deal and for the loan product that is right for them. Even for borrowers with good credit interest rates can vary greatly among top lenders for private student loans. Many private student loan providers charge fees. The fees charged by some lenders can significantly increase the cost of the loan.
Be careful. A loan that looks attractive with a relatively low-interest rate but high fees can actually wind up costing more in the long run than a comparable loan with a higher interest rate and lower or no fees. Most private student loans have an “in school” grace period under which the interest rates are lower.
There are also specialty private student loans available that are used for specific purposes such as:
- To Purchase a Computer
- To Study Abroad
- To Pay For Existing School Charges