What to Know
If you are coming up a little short on funds to pay this semester's tuition bill, you may be looking for last-minute student loans to help fill the gap. Before resorting to high-cost private loans, make sure you have first exhausted all of your federal loan opportunities. Even if you didn't apply for financial aid because you thought you weren't qualified, it might not be too late to qualify for at least an unsubsidized federal loan. It's also a good idea to check if your state provides its own student loan opportunities, which may offer better deals than other private loans (in Connecticut, for example, the CHESLA program offers fixed rate loans).
If a last-resort private loan turns out to be your only option, here are some important things to keep in mind:
- Private loans are usually more expensive than federal loans.
- Private loans require a credit check and rates are based on your credit worthiness, so you may end up with a higher rate than the low advertised rates.
- Interest rates on private loans are typically variable, meaning they can change with the market.
- Private loans often have additional fees, such as origination fees.
- Private loans most often require a cosigner; in many cases this may be a parent.
- Most private loans are not insured against death or disability, which means the cosigner is responsible for paying them back if something happens to the student borrower.
What to Ask
Before signing, you should ask about and make sure you understand the full cost of the loan, including all fees; terms of the variable rate, how it is calculated, and how often the rate changes (i.e., quarterly, annually); and repayment requirements and options. Make sure to ask the following questions:
- What will the likely monthly payment be under various rate change assumptions?
- What is the total cost of the loan likely to be with all interest and fee charges included?
- Are there deferment options or hardship waivers?
- Are there consolidation options and how difficult will it be to consolidate after graduation?
- Does the loan offer penalty-free pre-payment?
If you still don't understand all the terms and obligations, ask more questions or seek the financial advice of someone you trust, such as a parent.
It's also a good idea to compare the rates and costs against competitors. There are comparison calculators online, such as the New York State Higher Education Services Corporation's tool, which compares interest rates, estimated monthly cost and total costs assuming a $10,000 loan balance. If you are having difficulty finding a good tool or are still confused, you should contact your school's Financial Aid office for assistance.
What to Avoid
Be aware of the red flags that may indicate you're looking at a predatory loan. Specifically, consider how much you're borrowing, the company you're working with and what kind of deals they're offering you.
First, know when you're borrowing too much. Figure out the total amount you expect to borrow (including any federal loans) in order to complete your degree and make sure it's an amount you can reasonably afford to pay back. Some financial planning experts suggest that you should not borrow more than what your annual starting salary is likely to be. So, for example, if you plan to borrow $50,000 for a two-year degree in Early Childhood Education, and your expected starting salary is likely to be no more than $30,000, you may be getting in over your head. Another rule of thumb is to compare your estimated monthly payment to your estimated monthly income. Aim to keep your loan payment (assuming you don't have other consumer debt) to no more than 10 percent of your income.
You also need to be wary if the lender does not appear on your schools' preferred lender list. Find out why--there may have been issues with this lender or complaints about the servicing of the loan during repayment.
Lastly, remember that promises that seem too good to be true usually are. Some loan providers advertise very low rates, for example, but these are usually reserved for only those with the best credit ratings.
If you've already signed the paperwork but are concerned about the terms of the loan, most private student loan companies allow you to repay the loan without penalty. If that's not possible, it's definitely a good idea to start paying off the interest or a small amount each month while you are in school to get a jump start on paying it back.
For every term or school year, think hard about minimizing the amount you borrow; avoid the temptation to take out the maximum the lenders are offering (up to 100 percent of the cost of attendance in many cases). Figure out whether you can get by with less or work part time to help offset the cost of books, transportation or other educational costs.
The bottom line is that you want to earn your degree with the least amount of loan debt possible. That may mean some sacrificing along the way, but it will pay off in the long run in the form of reduced overall debt and interest costs, and more manageable payments that will decrease the likelihood of defaulting on your loans.