Post By: Guest Contributor, The Penniless Student
Of the types of student loans, private student loans should be your last choice. They usually carry higher interest rates than other college loan options, and their interest rates are usually variable, which is another way of saying that the interest rates could go up in the future when you least need it. Additionally, private student loans are dependent on your credit score, so if you don’t have a credit history or a credit-worthy cosigner, you may not receive favorable rates or repayment terms. However, if you have exhausted your other options like grants, scholarships, and federal student loans, education loans from a private lender may be your only remaining choice. If you are going to pursue debt from private lenders to finance your college education, there are a few things of which you should be aware.
Some factors to consider and questions to ask when shopping around for private loans:
- What is the repayment period for the loan? Don’t be fooled by a claim of low monthly payments that private lenders offer. The lender could be offering a long repayment period that will keep you in debt for decades. Understand how long you will have to pay off the loan.
- When do you have to start making payments? Does the loan require payments to be made while you are still in school, or is there a deferment period?
- Is there an early-payoff penalty? Some private loans will charge a penalty to pay off the loan before the scheduled payoff date to make sure that you pay the maximum amount of interest over the life of the loan.
- Does the private lender offer any options for modified payments? Some lenders will allow you to reduce your payment amount if you encounter economic hardship, many will not.
- Are there any discounts for paying on-time? And if so, does one late payment or a change in the payment schedule negate those discounts?
- What are the fees for the loan? In addition to the interest rate, you will also be charged fees. Be sure to compare different loans based on both the interest rate they offer and the additional fees they charge to be sure you are actually getting the best deal.
- Does the lender offer a fixed-rate loan? Fixed-rate loans offer predicable interest charges. The standard, variable-rate private student loan can change your interest rate for a number of reasons. This could stick you with high interest payments in the future. Interest rates on student loans can vary, so make sure you shop around for the best available.
When shopping for private student loans, the loan can be either certified or uncertified. Certified private student loans are “certified” by your college and can only be for amounts up to the total cost of attending that college minus any other financial aid you receive. Uncertified private student loans can be for any amount. There are two reasons to consider certified student loans over uncertified. First, certified loans help to prevent borrowing too much money since they can only cover the actual cost of attendance. Second, the interest on certified private student loans may be tax deductible, while the interest on uncertified student loans may not be.
The last thing that you have to consider when shopping for private student loans is that your credit score will affect the interest rate you receive. If you have a poor credit score or very little credit history, you will not be able to receive the best interest rate. This could cost you thousands of dollars over the lifetime of the loan. Make sure you know how good your credit history actually is. You are entitled to a free credit report each year. Go to http://www.ftc.gov/freereports to learn about this program. There are also services that will help you monitor your credit or give you your credit score. If you don’t have a great credit score, then try to find someone, possibly your parents, with a good credit score to cosign your loan.
Always remember that private student loans should be a last resort after all other sources of funding have been exhausted. If you must take out private student loans, shop around carefully to find the best offer with the best lender. The quality of private student loan lenders can vary greatly, so make sure you understand all the terms of your loan to avoid signing-up with a unethical lender.
