Private student loans are loans made by banks or other financial institutions for financial aid. The main difference between private and federal student loans is that federal loans are funded by the government. In the 2011-12 school year, almost 1.4 million undergraduates borrowed private loans.
Who Provides Private Student Loans?
In general, private student loans are made by:
- Banks
- Lending institutions
- Credit Unions
- State Agencies
- Schools
What Options Are There Before Taking Out A Private Loan?
Before applying for a private student loan, students should consider other types of funding such as:
- Scholarships
- Grants
- Work study funds
- Federal student aid
In general, federal student aid comes is the first choice for student loan borrowers. For example, federal student aid comes with fixed rates set by the federal government. Private loan interest rates can be higher, but they also offer variable options, which are generally lower than federal offerings. Federal loans and some private loans also offer forbearance, which allows the borrower to forgo payments while in school. It can be difficult sometimes to know which option is best, but before choosing explore all options and see where your best rates and repayment goals fall.
How Are Private Student Loan Interest Rates Determined?
Private loan interest rates are usually based on the LIBOR, which is an international benchmark rate that banks charge for loans. The actual loan rate is calculated by adding the LIBOR to a percentage that the lender applies. Rates that use the LIBOR are variable.
Co-Signer Considerations
For federal student loans, no co-signer is needed. For many private loans, you may need a co-signer. This means someone, usually a family member, agrees to take responsibility for the loan if you can’t pay it back. There can be advantages to having a co-signer. If their credit is excellent, this might allow you to take out a loan with lower interest rates.
What About Private Loans For Graduate Students?
Some lenders are willing to offer improved rates for graduate students. In general, grad students are low risk borrowers, and this might translate into lower interest rates.
Who Should Take Out A Private Student Loan?
Private student loans are typically considered after federal and grant options . However, there can be some situations where private loans make sense, like when a co-signer’s credit ratings are rewarded with lower rates. Also borrowers willing to take out a variable rate loan can also benefit from the currently low interest rates.
With many private loan options, it pays to shop around and compare rates. Check out Credible to help make this process easier.