You get your award letter, see what financial aid has been awarded, scan down to the bottom and you see what you have left to pay. First before you have a freak out moment about what it will cost to attend college, look at all the financial aid you have been awarded. Good job! So now you have to figure how to pay what is left. You are a freshman in college and based on the loan limits you have been awarded, you still do not have enough financial aid to cover your bill. You are a first generation student and your parents are not too keen on borrowing loan funds in their name. However they are willing to be a co-signer with you on a private student loan. So there you have it, my personal story of how I came to borrow a private student loan. Most of the time private student loans are used to fill the gap between what financial aid a student has been awarded and the amount the student owes. There are people I know who have borrowed a private student loan instead of federal loans. At the time they could get a lower interest rate and had plans of paying the loan off rather quickly. So it worked out best for them to borrow a private loan verses a federal loan.
This is the conclusion of our three part series on loans for college. We first looked at subsidized and unsubsidized loans in which the borrower is the student and the lender is the Department of Education. The subsidized and unsubsidized loan is the most common loan students borrow to pay for college. It doesn’t require a credit check, repayments are deferred until 6 months after graduation, and there are flexible repayment plan. Next we took a look at the Parent PLUS Loan. This loan is borrowed by the parent and the lender is also the Department of Education. The interest rate on a parent PLUS loan is fixed, repayment can also be deferred until after your student graduates, and the repayment plans are flexible as well. Finally we come to our last loan type which is the private student loan.
U.S. News and World Report has an excellent guide that provides all the information you will need to know about private student loans. They even break down the best private loans of 2018. Be sure and take a look at The Best Private Student Loans of 2018.
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7 Things to Know About Private Loans for Students
1. What is a private student loan?
It’s an education loan provided by a private lender/bank for the purpose of paying for college.
2. Who is the borrower?
The student is the borrower and more than likely will need a co-signer who will probably be the parent.
3. Who is the lender?
Any private bank who offers private student loans for college can be a lender.
4. Do private loans have interest?
Banks will offer either a fixed interest rate or a variable interest rate. A fixed interest rate is set when the loan is created and never changes during the life of the loan. A variable interest rate can fluctuate throughout the life of the loan. Interest rates are determined by the lender, credit, loan terms, and the current market. Fixed interest rates could be higher however variable interest rates can increase or decrease over time which could be a risk if you are unable to pay off the loan in a shorter period of time.
5. Are than any other fees?
Some private lenders do have an application fee and origination fee. An origination fee is a percentage taken out of the gross loan amount upon creation of the loan.
6. When do private loans have to be repaid?
Repayment options vary. It is especially important that you pay attention to this feature when shopping for a private student loan. Some lenders allow you to defer the private loan until after graduation. Other lenders require at least interest payments once the loan is disbursed. Then there are lenders that require a $25.00 per month payment after the loan is disbursed. If you can handle making payments on a student loan while your student is in college we strongly recommend it.
7. How do I repay a private loan?
You will pay the lender when you begin repaying the private loan. Some lenders have a % discount if you set up auto payment. Another thing to look for while shopping for a private student loan is the loan term or the life of the loan. Private student loan terms can range from 5 years to 20 years. The shorter amount of time the loan term is the less you repay however with a shorter loan term there is also a higher monthly payment.
How to Apply for a Private Student Loan?
You will apply online with the lender of your choosing. Eligibility of a student loan is determined by your student’s citizenship status, enrollment status, age, income, and credit history. Most students do not have a credit history and therefore will need a co-signer. Your student will want to find a co-signer with a good credit history because it is the credit history that will determine not only your student’s eligibility but also the interest rate for the loan. There is a lot of personal and financial information you will need to provide when applying for a private student loan.
After You Apply for a Private Student Loan
Once your student has applied of a private loan for college the lender will process the information provided and notify your student if more information is needed or if approved. Once approved your student and the co-signer for the loan will choose the amount desired to borrow, along with the interest rate, loan term, and repayment plan. The amount your student is eligible to borrow is the difference between your student’s accepted financial aid and the cost of attendance. For example if the college where your student plans to attend has a cost of attendance of $32,000.00 and the financial aid your student was awarded is $29,000.00, the amount your student would be eligible to borrow in private loans would be $3,000.00. This information can be found on your student’s award letter.
Once the amount to borrow is determined, your student and co-signer will want to pick the best interest rate, loan term, and repayment plan. Some lenders have a fixed loan term most ranging from 10-20 years. It is up to you and your student to pick what is best for them. Always remember you want to pay back the least amount of money. Lower interest rates and shorter loan terms are the best.
After your student’s private loan has been approved and everything is finalized on your end, the lender will notify your school of the approved application and amount. The school will verify your enrollment status and approve the amount requested. The amount your student requested is subject to change if it does not exactly match the cost of attendance minus the accepted financial aid. Then the school will schedule the disbursement dates and amounts for each date.
Once the private loan has disbursed it will be applied to your student’s school bill. If there is a credit balance on your student’s school bill a refund will be issued to the student and can be used for educationally related expenses.
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Private Loan Repayment
Repayment for private student loans is something you and your student will want to consider when shopping around for a private loan. Repayment options vary based on the lender. Some lenders have grace periods after a student stops out or graduates from college. Other lenders offer in-school deferments and economic hardship forbearance. Private loan repayment options are not as flexible as they are for federal loans. Repayment for private loans is set and not income based.
There are pros and cons to both federal loans and private loans. If you and your student are thinking about applying for a private loan, we highly recommend you read The Best Private Student Loans of 2018 by U.S. News and World Report. Also always exhaust your financial aid like scholarships, grants, and work-study before borrowing loans. If you must borrow a student loan always remember to only borrow what you need. As always please feel free to leave any comments or questions in the comment section below.