If you have received your financial aid award and still need money for college, private loans may be worth considering. Private loans are offered by banks, credit unions, and other lending organizations.
Private loans are taken out in your name, and often require you to apply with a qualified cosigner who has an established credit history. Even if a cosigner is not required in your situation, using one may still help you obtain a better interest rate. Be aware that the best rates are provided to borrowers and cosigners with the strongest credit qualifications.
As a general rule, private loans should be the last financial aid option. Always file the Free Application for Federal Student Aid (FAFSA) first, and accept any grants, scholarships, work-study and federal loans offered by your school before taking out a private loan. Federal loans offer more repayment options, income-based programs, and in some cases, loan forgiveness alternatives.
If you decide a private loan is right for your situation, here are some things to consider when selecting a program:
1. Check to see if your college has a recommended lender list.
Some schools investigate private loan programs and providers on behalf of their students and provide lists of those they think would best meet their students’ needs. If your school has a list, you can begin there. School lender lists are generally posted on your school’s financial aid website. In many cases, the website will link you to a third party where a list of programs is provided on behalf of your school. In either case, loan programs are usually listed by feature, so you can compare to see which might best meet your needs. If your school does not have a lender list, you can investigate Credible or other websites which will provide loan program options and help you compare features.
2. Decide which features are the most important to you.
Read the descriptions to find out about the differences before selecting a private loan program. These are some of the top features to consider:
- Rates – As you compare interest rates, you will see that some lenders use an index called London Interbank Offered Rates (LIBOR) and others use the Prime Rate index. Since they are not the same, look instead at the loan programs’ Annual Percentage Rates (APRs). The lowest and highest APR ranges will generally be displayed. If APRs are not listed, you should be aware that the Prime Rate is typically two to three points higher than LIBOR. The most current rates can be located in the Federal Reserve’s Statistical Release.
- Fees – Most private loan lenders offer zero application and origination fees. Check all loan programs you are considering to make sure this is true and to determine if there are other fees associated with the loan.
- Repayment plans and terms – Would you prefer in-school interest payments to keep your costs down? Perhaps multiple repayment period choices like a 5, 10, or a 15 year period are best for you. With private loans, you choose your repayment period at the time you take out your loan. You may also want to check to see if there are deferment or forbearance options if you run into difficulty in repayment.
- Cosigner release – Your cosigner is responsible for making payments if you do not. Any late or missed payments will be reflected on the cosigner’s credit report as well. When investigating options, determine if the program offers a cosigner release, how many payments you will need to make before that is possible, and how involved the release process is.
- Borrower benefits – Lenders offer a variety of benefits like interest discounts for auto-debit payments, cash back for achieving certain grades, or interest reductions after a specific number of on-time payments. Be sure you determine which are the most important to you and take the required action to meet the requirements.
3. Understand the difference between fixed and variable rates.
As you compare differences between programs, interest rates may be a primary factor. You will need to decide between fixed rates, which may be higher at first but remain the same throughout the life of your loan, or variable rates which may be lower at first but change periodically based on fluctuations in the economy. For more information about the factors to consider before making this decision, go to U-fi’s frequently asked questions.
4. Your rate is the one that matters most.
Lenders may advertise low rates when they share their program’s interest ranges, and many students assume they will receive the lowest rates. See if lenders allow you to use a calculator. If you can enter general information about you and your cosigner, you may be able to obtain a preview of what your interest rate will be before completing the application process and providing authorization for your credit to be pulled.
Private loans can provide a solid financial option for students who need help bridging the gap between financial aid and college costs. Be sure to first research programs fully and understand your responsibilities before taking out any type of education loan. If you have questions, your college financial aid office is the best source of information and guidance about your individual situation.