Wednesday, April 1, 2015

When to consider a Private Student Loan

From room and board to tuition and textbooks, college is expensive. Fortunately, student loans can help students and their families shoulder some of the costs. One option you may want to consider is applying for private student loans, which are offered by financial institutions like Community Resource Federal Credit Union. Here’s a look at how this type of loan differs from others.

Private vs. federal student loans
There are two main types of loan programs targeted at postsecondary students: federal and private. Federal loans, which come in several different varieties, generally offer fixed rates and may be offered directly by the government or through the college.
Private student loans, on the other hand, usually feature variable interest rates, meaning they can fluctuate over time. Federal loans typically impose borrowing limits and may have other restrictions. Private loans may not have such restrictions. Therefore, private loans can be taken out to cover whatever federal loans fail to.

Private and federal student loans are similar in that they both generally let students defer payments while they’re still in school. Some also offer economic forbearance options once you graduate, which essentially limit what you owe the lender while you’re still fresh out of school and not yet raking in the big bucks.

Look for reasonable rates
Private student loan rates vary greatly from lender to lender. Because some rates on private student loans can be quite high, it’s important to shop around. Some lenders may offer rates as low as prime, which at its current 3.25% Annual Percentage Rate is lower than the fixed rates on most federal loans. Some lenders even consider academic performance when determining rates, which means that a high GPA will be rewarded with lower rates. Borrowers may also be able to reduce their loan rates by repaying their loans via automatic payment.

Other tips
To be eligible to apply for private student loans, you typically must be an American citizen or a permanent resident enrolled either as a part- or full-time student at an eligible institution.
Because most young people haven’t had the time or resources to establish extensive credit histories, students may need a co-signer. If this person — generally a parent or relative — has good credit, you’re more likely to get a lower rate (and get approved in the first place). Make sure your co-signer knows he or she will have to assume all legal responsibilities for the loan in case you are unable to pay it back.

The takeaway
Private student loans can be an excellent way to help pay for college costs, especially when federal loans fall short. Just as doing your homework helped get you into college, so too can it help you find a lender with good rates and terms.


Tony Armstrong, NerdWallet