Private student loans are used to supplement the grants and scholarships that make up most students' financial aid packages. These loans are available from federal and state governments and from private lenders. Private student loans are much like personal loans, except they are structured for students. These loans often mimic the government-run loan programs with repayment terms and forbearance/deferment options.
Function
The function of a private student loan is to address the needs of those who do not qualify for government loans or those who do not receive enough aid (in grants and scholarships) to cover the cost of schooling. Often, loans are used to cover the cost of living while the student is in school. Qualifying for these loans involves the same structure as applying for other personal loans. A good credit rating, history of on-time installment payments and qualifying debt-to-income ratio still apply. That's true even though they may not be weighted as heavily as other personal loans. It's important to examine your household budget before applying for any loan, even one that is geared towards students.
Features
Private student loans often carry a higher interest rate than government-sponsored student loan programs and also often require the student to make some payments while enrolled in school. (Most government student loans only require monthly loan payments after the student has left or graduated school.) The private loans may ask a student to pay minimum payments through school, or they may offer interest-only payments while the student is in school. Some private lenders will follow the same procedure as the government in allowing no payments during school, deferment or forbearance. The life of the loan can vary from one year to up to ten years, with interest rates slightly higher than the federal student loan interest rate.
Types
A large variety of private student loans are available from various lenders. These are classified into loans for graduate and undergraduate loans. Private student loans typically have a lower interest rate than simple personal loans. This interest rate will most often be a variable APR based on the student's credit rating. Repayment terms are often incorporated into the loan structure. These terms will be compatible with school scheduling and expected graduation dates.
Considerations
When shopping for a private student loan, it's always a good idea to begin with your current banking institution. As a member or customer, you'll be eligible for the loans your bank offers for students. You may want to contact other banking institutions before making a final decision. Comparing interest rates and terms will make sure that you take out only the most suitable loan for your lifestyle. A few good places to start your search for a private student loan include Wachovia, JP MorganChase, Citibank, WellsFargo, and Bank of America. Additionally, many regional or local banks offer loans through their local branches. Most of these institutions offer online or phone applications that can be reviewed quickly. Each institution offers Stafford and Perkins loans as well as private loans. These loans will be listed separately on their Websites and literature. Before applying, make sure you have your personal and financial information available. You'll likely also need your school and enrollment records.
Warning
Private student loans are just as dangerous as other loans can be for credit ratings and history. Although they are geared towards students, with lower rates and modified repayment plans, these loans can still add up quickly. The loans can damage your credit rating if not dealt with responsibly by making on-time payments and applying for deferment or forbearance when necessary. Utilizing loans instead of scholarships or grants can also mean a student will graduate with a large amount of debt upon their entry into the professional world. It can cause financial stress in recent graduates who are looking for careers.
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