If you, like many others, are in need of additional financing for college after taking advantage of your child’s federal student loan eligibility, a private student loan may meet your needs. Before you choose a private student loan, consider the following:
1. Are you or the student able to make any payments while the student is in school?
Some lenders require payments of principal and interest, others interest-only payments, while the student is enrolled in college. If you or the student can make these payments, this is a great way to keep debt down. If you are not financially able to make payments while the student is enrolled, you should instead look for a loan that can be fully deferred—that is, one that does not require any payments while the student is enrolled in school.
2. What are the interest rate options?
Some private student loans have variable interest rates that will change during the student’s repayment period, while others have fixed rates. Interest rates are at historic lows right now, making variable rate loans look very attractive. Keep in mind that the only place for that rate to go from today’s low rate is up! Add five percentage points to the interest rate you are quoted today to get an idea of where the interest rate might be in five or so years.
3. Does the student need a co-signer? Are you willing to co-sign a loan?
Private student loans are based on the credit record of the borrower. An 18 year old student with limited or no credit history is unlikely to get approved on his or her own and definitely will not be offered a competitive interest rate. Therefore, he or she may need to consider applying with a credit worthy co-signer.
A co-signer is a second borrower on the loans and is as responsible for the loan’s repayment as the student. You put your own credit record at risk when you co-sign a loan. Some private student loans offer co-signer release clauses. Borrowers of loans with co-signer release clauses can re-apply for the loan after a certain amount of consecutive, on-time payments. If the lender deems the borrower credit-worthy, the loan will be reissued to the borrower without the co-signer as a second borrower. In this way, the co-signer is released from any future repayment obligation.
4. What are the repayment terms?
The longer the loan’s repayment period, the lower the monthly payment but the more interest that has to be repaid. Look at each loan you are considering and think about whether you or the student can meet the minimum required payment. Then multiply that monthly payment by the number of years your child will be in college, because you may need to borrow a new loan for each year of enrollment. If you cannot meet the monthly payment for one, four, or five years, look for a loan that has a longer repayment period.
5. Does the loan have prepayment penalties?
Sometimes the student does not need a longer term to pay off the loan and can make a larger monthly payment or even pay off the loan early. If this is a possibility or something you’d like, make sure the loan has no penalties or costs for prepayment or for paying more than the minimum.
6. Will the lender help the borrower if he or she gets into financial hardship?
If a student re-enrolls in school, becomes unemployed, or has other financial difficulties, he or she may be unable to meet the loan’s terms. Understand the deferment and forbearance options before signing the promissory note. Some lenders limit these options to one year after graduation, while others do not offer these options at all.
7. Does your state, or the state in which the student’s college is located, offer a student loan?
Many states offer credit-based loans to students who lived in the state before they enrolled in college, or who enroll in a college in that state. These loans may offer favorable terms that private lenders may not. Many states offer fixed interest rate loans, for example, or variable rate loans that have lower caps than private lender loans.
8. Is a tuition payment plan available at your college?
Before borrowing a private student loan, be sure you’ve determined whether or not the college’s monthly payment plan will meet your financing needs. Most colleges offer payment plans that allow families to stretch yearly tuition payments over 9, 10 or 12 month time-frames, as opposed to coming up with two large payments for the fall and spring semesters. Though a payment plan may charge a small administrative fee, it will cost you far less in the long run than interest charges on a private student loan.
Though not an exhaustive list, the above factors are important ones to consider when choosing a private student loan. As always, be sure to explore all financing options, and consider consulting with a college finance professional, before signing on the dotted line.