Private Student loans are loans that are underwritten by financial institutions such as banks and credit unions. The decision to issue a private student loan rests with the lender and is most based on your credit score, credit history and credit worthiness.
When do I use a private student loan?
Your first option to funding must be to apply for a scholarships, followed by grants, followed by Government funded federal student loans such as Stafford Loan, Perkins Loan and even the PLUS loan. If for some reason you do not get any of the above or if you find that your expenses are not covered completely by a scholarship, grant or federal aid, you can then apply for a Private student loan.
What can I use my private loan funds for?
Most private loans will ensure that your school tuition is covered completely and will also pay for education related expenses such as school supplies, room and board, laptops etc
What are the requirements for a private loan?
The eligibility requirements for a private loan are usually the following
- You must be a US citizen or a permanent resident
- You should be enrolled in an approved school
- You must have acceptable credit history, score and must be deemed credit worthy. You can apply with a co-signer to overcome this requirement
How much can I borrow using a private loan?
The amounts vary and is dependent on the lender and your credit worthiness. Usually private loans aim to cover your complete cost of attendance minus any other aid your might already have received.
Private student loan interest rates and related costs
The interest rates for a private student loan is usually a variable rate that adjusts every month, quarter or year. The variable interest rate is usually tracked to a variable index like the treasury bill index or the LIBOR index plus some margin on top of that. The actual interest rates will vary from lender to lender and also will depend on the credit history and worthiness of the applicant. Be prepared to shop around to get the best deal.
The most common fees that you will find when applying to a student loan are application fees, origination fees and repayment fees.
Private student loan repayment
Certain private student loans defer payments till the time you are in school. This gives you the luxury of graduating from school and then starting your repayment. However keep in mind to check if the interest on the loan is accrued during the time you are in school. This can increase your final loan amount drastically. Some private loans however require you to pay even when you are in school. There might be a small grace period but your payment will start while you are in school. The payments you make while in school will be interest only payments and this will help you in keeping your total loan amount from ballooning out of control.
Are there any prepayment penalties?
Usually no, a prepayment penalty is when the financial institution applies a fee if you pay off your loan earlier than your loan term.
Do I have the options of Forbearance & Deferment?
Unlike federal loans, private student loans do not have forbearance and deferment options. So if you are have trouble with your payments later on, there is no deferment or forbearance option to fall back on that will stop your loan payments for a short period of time. That said, this can vary from lender to lender and is one of the options to look for when you are doing your lender research.
Can I consolidate private loans?
Finally let me just again remind you to exhaust all your funding options such as free grant money, scholarships, federal aid before you look to private student loans as means of funding your education
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