Have a seat. So let me make sure I understand. You have received federal loan money or scholarships, but you still cannot quite cover all your college expenses, and your family cannot help, is that correct? Okay, let us discuss your final option then. It really needs to be the final option because it is typically the most expensive option and often the most unforgiving, but it is an option. Let’s talk private student loans.

What are Private Student Loans?

Private student loans are borrowed money, so it has to be repaid, unlike a scholarship or grant. It not only will cover tuition and fees, but also will cover other expenses, such as housing and technology needs. It can also be supplementary to fill in the gaps that your current monies or federally funded student loans don’t cover.

Almost anyone can qualify for student loans borrowed from private financial institutions, but what vary from student to student are the terms and conditions that apply. Credible lenders will contact the school you are attending and limit the loan amount to the cost of attendance minus all other financial aid so you take on a manageable amount of debt.

What Makes Private Student Loans Different?

Let me clarify the difference between a private student loan and a federal student loan or a loan from a small bank or credit union. This is a long-term obligation you are making so you need to take it seriously.

Private loans typically have higher fees and interest rates than federal government loans, but even riskier is the fact that, unlike government loans, private loans do not offer the opportunity for cancellation or loan forgiveness that is available with many federal loan programs. So if you encounter economic hardship, there are no protections for delaying or reducing payments, and these student loans can’t be included in bankruptcy.

The Chase website even states:

“Students are strongly encouraged to exhaust federal loans, scholarships, grants and other financial aid before applying for a private student loan.”

This is from a company offering private student loans!

But a private student loan may be preferable over a loan from a small bank or credit union in that most of them don’t offer a student loan, but would grant a personal loan. You would still get the money you need, but most don’t have options for repayment like private student loans have and you have nothing to stop you from over-borrowing.

How Do You Find a Private Student Loan?

So you think a private student loan is something you want to pursue? This is the easy part. Most private banks and lenders will be happy to give you offers. Some of the most common lenders are private banks and credit card companies, such as Sallie Mae, Chase, Citibank, Wells Fargo, Discover, KeyBank, American Education Services (PHEAA) and ACS Education Services. There are some other smaller institutions that offer private student loans as well.

How Do I Know Which Loan is Best For Me?

Okay, start doing your homework because not all loans are the same across the board. Beware of “specials” that would be attractive if you were buying a new sweater but not if you were looking for a private student loan. For example, don’t make your decision to go with a loan just because you get a free gift card or a sweepstakes prize when you sign up. All those little gimmicks don’t matter when compared to what you could end up paying.

Some things to consider when looking into the different institutions are origination fees, which are added to the principal of the loan, interest rates, and repayment options, and, of course, interest rates themselves. Lower interest rates mean you pay less over time while you pay back your loan. Be aware also that some lenders offer specific loans for different programs, such as a student loan program for health professions students. Sometimes choosing a lender for a private student loan can seem as difficult as choosing a school to go to in the first place!

Be sure to read the fine print on the interest rate offered for private student loans. Often the posted loan interest rate is low, such as 3.2 percent, but not everyone can qualify for a rate that low. That may be for someone with great credit. Plus, the interest rate is often variable, meaning it may start lower, but will increase over the life of the loan. Many lenders won’t disclose the final costs or interest rates for a loan until the application process is complete so do your homework before applying.

Repayment of a private student loan is what may seem most enticing because most lenders offer options. You can get a loan that is paid off a little every month from the time you get the loan. You set it up to pay off only the interest monthly while you are an enrolled student, then pay off the principal. Or there are deferred payment loans where payments of the principal and interest don’t start until you graduate.

While you may feel like high-fiving yourself for the thought of hardly having to pay anything as you go to school, these can be costly options. To see an example of the different payment options, visit chasestudentloans.com/apr-example.html. It gives you a pretty realistic vision of what each option would be like at different interest rates and how much you end up paying in the end.

The number of years you are allowed to extend the loan varies between lenders, but some, depending on the program and if it’s a graduate degree, will give you up to twenty years to pay it off.

What Will Private Student Lenders Ask For?

You’ll also want to There are some requirements with private student loans. Some lenders require that either you or the cosigner have a qualifying account or a loan relationship at that institution already. With any institution’s application, you have to be a legal U.S. citizen with a social security number and be able to pass a credit check.

Do you have good credit? Get some. Or find a co-signer who has good credit, because private lenders will use your credit score to determine the interest rate of your loan. Many lenders will encourage you to use a co-signer because either you don’t have a good credit score and can’t get a loan on your own or your co-signer has a good credit score and can get you a better rate.

So that’s that on private student loans, from what they are to who offers them and how they are set up and repaid. While this may not be the most ideal way to finance your education, it is an option; just proceed with caution. You may be excused.

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