Loans
August 5, 2015

Private Student Loans: What Are the Pros and Cons

Simple. Thrifty. Living.

Private student loans are obtained from banks or other lending institutions, and they are intended as a source of fallback funding. In many cases, a student’s full college expenses cannot be met solely through federal financial aid and assistance directly from the college itself. In those situations, private loans make it possible for students to attend school.

The benefits of private student loans include a streamlined application process and the fact that the money can be used for any purpose. The drawbacks center on higher interest rates and fees, and the fact that co-signers are often required. Here are the basic facts you need to know in order to understand private student loans:

Private loans are made directly to the student or their parent, and they can be used for any type of expense (books, rent, transportation, etc.) The application process for private loans is streamlined; banks are interested in finding customers for their loan products, and they make it easy for you. In most cases, private loans can be applied for online – you don’t even have to visit the bank in person. No FAFSA forms to see who the best option is for you. You are required, and the funds are available as soon as the bank approves your loan. If you are looking for a loan with low interest rates without dealing with the big banks, you might want to Lending Club, which is a peer-to-peer lending site.

Not everyone can qualify for a private loan. Interest rates and eligibility depend on the outcome of a credit check, and in all cases the interest will be higher than on federal loans. If a student doesn’t have a credit history, the bank will require a co-signer, although in some cases the co-signer’s name can be removed after a few years’ worth of on-time payments have been made.

Interest rates on most private loans are variable, which means that the payments periodically change in response to economic market activity. This variability makes budgeting more of a challenge. With excellent credit, it’s possible to get a private student loan with interest rates of LIBOR +2.0% or PRIME -.50 % with no fees. It’s important to keep in mind that high fees can balance out low interest rates, and 3% to 4% in fees is roughly equivalent to a 1% higher interest rate. You can compare a large selection of private student loans at SimpleTuition.

While private loans don’t offer the income-based reductions in payments that federal loans do, it is possible to consolidate several private loans into one single loan. This can reduce monthly payments, although it will correspondingly increase the lifetime of the loan. If your credit score has improved since taking out the loan, however, it’s possible that you can get adjusted terms on your loan that are better than the initial ones. There are specialized education lenders that offer consolidation packages on student loans.

Investopedia gives the “bottom line” about private student loans in this way: “Because private lenders typically charge a higher interest rate, it’s a good idea to explore other, less expensive forms of financing first including grants, scholarships, work-study programs and federal loans.”

An education is an investment in the future, and so it’s a good idea to explore all sources of funding. Private loans have a role in making education possible, as long as you have a clear understanding of the agreement you are making. If you are currently looking for a private student loan, SimpleTuition, a site that aggregates a large collection of student loan options and can help you find the right one for you.

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