Because college is no cheap endeavor, the average person does not have the financial means to pay for a college education without some type of financial assistance. The reality for most is that even with scholarships, grants, and federal student loan money the costs of college are still not 100% covered, leaving many turning to private student loans to fill the gap. Now it would be ideal if private student loans were only used to “fill that gap”, but unfortunately there are borrowers who turn to private student loans without first exhausting all of their other financial aid options, which can be a recipe for financial disaster after graduation.
Why you should not even consider private student loans until you have exhausted all of your federal student loan options:
1. Private student loans can not offer you as affordable rates as federal student loans can.
2. Private student loans can not offer you fixed rates.
3. Private student loans do not offer the flexible repayment options that federal loans do.
For these reasons, borrowers should exhaust all federal grant and loan options (including PLUS loans) before considering a private student loan.
A little background on private student loans:
Banks and other financial institutions (including some schools) make private student loans without any financial backing from the federal government. The interest on all private student loans will either begin to accrue from the time they are disbursed OR the interest costs will be deferred and capitalized (added to your principal balance) once repayment begins. There are many different private student loans out there, and each private student loan comes with its own terms and requirements.
Private student loans are also offered by the same lenders that provide federal FFEL loans, this does not mean private student loans from this lender are any different, they are still “private student loans”. The federal government does not subsidize any private student loans, and therefore the rates and terms are NOT regulated the way they are for federal student loans.
Obtaining a private student loan:
Private student loan interest rates and fees, are based on your credit history (or a co-signer’s credit history). Since many students have little credit history to no credit history, this can be a hurdle when trying to obtain a private student loan. In addition, low-income students or those with bad credit histories will likely receive more expensive loans (if they can even secure the loan at all without the help of a cosigner).
Many private lenders will require you to get a creditworthy co-signer for the loan. A co-signer can be a relative, friend or someone else who agrees to be responsible for the debt of your loan in the case that you stop making payments (think of a cosigner as the lenders “insurance”).
Before you make the decision to obtain a private student loan you need to understand, there are very important differences between federal student loans and private student loans. A private student loan, will not be eligible for the same types of discharge, deferment, and forbearance options available for federal student loans. You must do your research, compare different private student loans from different lenders, and read your loan contract carefully to fully understand your private student loan’s particular terms, conditions, rates, fees, and any penalties.
TheStudentWhoGotScrewed:
is a 27 year old college graduate from the University of Wisconsin-Milwaukee, currently living in the Chicago, IL area. Read all of my posts by clicking here and read my profile by clicking here. Share your student loan experiences, stories and tips with me and other readers by dropping a comment!
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