Facts About Private Student Loans

The need to go further with education is sometimes hampered by the fact that majority of students and parents are financially strapped and rendered incapable of paying for the education. The solution to this problem is to look for other sources of funds and financial assistance.

One such source of financial aid is the federal government. The federal government offers subsidized and unsubsidized loans to students, depending on their needs and qualifications. However, it appears that despite the $80 Billion annual allocation for loans, grants and other financial assistance, it still isn’t enough. They do offer direct-to-student and direct-to-parent types of loans. With their student loans, you are not required to start paying until after your graduation but on the other hand, their amounts are fairly limited starting with $2,625 annually for College Freshman students. By July 2007, this figure will hopefully be increased to $3,500. Parental loans have a much higher limit but payments will have to start immediately.

A good thing with federal loans is that, with either subsidized or unsubsidized loans, the government through the Department of Education offers a guarantee on the loans, meaning your interest rate fees will not go higher than 9%.

Private student loans are becoming a new burgeoning industry and popular source of educational funding. Sourced from banks and other financial institutions, private student loans don’t offer any guarantees like federal loans (as explained above) but offer higher limits and as much as a 12-month after graduation grace period.

However, the amount of approved loan is determined by the applicant’s credit history. If you have a good credit standing based on the credit report that the private lender evaluates, you have a good chance of getting a higher loan amount and lower interest rates. This does not bode well for students without parents to co-sign on their behalf or for those with no credit history at all. They might end up getting the most expensive loans because of this requirement. This practice seems to go against the principle of providing financial aid to those who are most in need of it.

The emergence of numerous private student loans providers may also be attributed to the popularity of the industry. They are very aggressive with their marketing strategies as evidenced by the number of student loan provider hits when doing a search on the Internet. They all boast of fast and convenient online applications which attract a lot of potential borrowers. These applicants are seen to be overwhelmed by the seemingly long and arduous process of federal loan applications.

Contrary to the guarantee of federal loans, private student loans don’t offer the same security. Interest rates may fluctuate periodically which will definitely affect your loan payments. For instance, when you started school on a loan at an interest rate of 8.5%, by the time you graduate and start paying for your loan, the interest might have already jumped to 11%. Just imagine the surge on your total loan this will amount to.

Another important factor why private student loans are becoming popular is that federal loans are generally restricted to US Citizens. International students are not allowed to apply for such loans, which is why they are seeing private student loans as a lifesaver for them. With private student loans, their applications will be considered provided they have a US Citizen or permanent resident co-signing on their behalf.

Borrowers are also of the belief that it is worth the price of paying high rates in exchange for quality education.

If you have not availed of any student loan, you may content yourself with the school you can barely afford. But now, with the benefit of private student loans, you are able to choose the best school for you, knowing that you will most likely do better here than elsewhere. You can worry about paying off the loans later on.

The final decision, in the long run, will be entirely up to you. Your choice between federal or private student loans must be well thought of and planned carefully, taking into account your capacity to pay at the end of your term in school.