What you should know about private student loans.
So you’ve filled out your FAFSA on the web and received your financial aid award letter from your chosen school. You do the math and realize that with all the expenses such as tuition, room and board, and books that you are still short and need more money before the semester begins.
Millions of students every year apply for financial aid and still need additional private student loans to fund their education.
Private student loans can be a good way to pay for what federal aid and school grants and scholarships don’t cover. But there are some key aspects of private loans that differ from federal loans, knowing this information before you apply for a private student loan can save you time and money.
Most private student loans come with a higher interest rate often a few percentage points above even the highest federal loan interest rates. The interest rate on private student loans varies and is based in part on your credit history, your cosigner’s history (if you have one), the amount borrowed, and other factors.
Fees and payments.
Many federal loans allow you to avoid disbursement fees. Only some private loans waive these fees. You may also be assessed various fees for maintaining the private loan, every disbursement, and processing fees.
As far as payments go, private loans are more likely to require at least interest only payments during school than their federal loan counterparts.
Also in regards to payments, private student loans may come with stricter repayment terms that aren’t as flexible as federal loans.
Unless you are in graduate school, most federal loans are capped at a relatively small amount per school year. The amount may increase slightly for each year you complete of undergraduate study but even that is still far lower than the amount that can be taken out on private loans.
Many student loan issuers allow up to 40,000 dollars per year to be borrowed for school. Compare that to around 22,000 dollars for each year of graduate school for federal loans and around 5,600 dollars a year for undergraduates in their final year of college and it is easy to see how students can build up a large amount of private student loan debt.
It also may be harder to defer or extend payment terms for private loans when compared to doing so for federal student loans.
However, when used to fill in the gap between actual school cost and your financial aid award letter, a private loan with a decent interest rate can be a smart choice. Only borrow what you need, try to make some small payments while still in school, and shop around for the best rates.