Private student loans, sometimes called alternative education loans, provide money for students with no other way to pay for higher education.
Private student loans are offered by private lenders such as banks rather than the government. Because of this, they come with higher interest rates and are dependent upon your credit history. A better credit score can qualify you for a lower interest rate, while a score lower than 650 may prevent you from qualifying for any private education loans.
This type of loan should be considered only after you’ve exhausted your options for loans with more lenient terms, such as federally funded Stafford, Perkins and PLUS loans.
Basic Private Student Loans
Because you are looking to borrow from a private lender, your loan eligibility relies on your credit history rather than on your financial need. This means you do not need to complete a Free Application for Federal Student Aid (FAFSA) or any other federal applications.
However, experts suggest you complete the FAFSA anyway. Completing the FAFSA will tell you if you are eligible for better financial aid options such as grants, federal loans and work-study.
Loan offers can vary drastically by lender, so explore all of your options carefully. Check with banks and credit unions, as well as other private lenders. Different lenders likely will have different policies on payment deferment, interest rates, repayment plans and loan limits.
Many lenders allow you to defer all payments until after you’re done with school. Some even provide you with a grace period of six to nine months, meaning you won’t have to begin repaying your loan until after you’ve been out of school for a little while.
Other lenders may require you to make some payments while you’re still in school. You may have to pay the interest each month, or you may have to start repaying the principal amount immediately after finishing school.
Most private student loans have interest rates tied to the economy and dependent upon either LIBOR or PRIME, two common indexes.
The LIBOR index, short for the London Interbank Offered Rate, is an indication of how much it costs for banks to borrow money from other banks. It represents the recent average interest rate earned by deposits in the London market.
The PRIME index, short for Prime Lending Rate, reflects the lowest interest rates currently offered by banks.
The interest rate offered on an education loan will be close to one of the indexes. An interest rate of LIBOR + 2.8 percent means your interest rate will be 2.8 percentage points greater than the LIBOR index. Currently, an interest rate of LIBOR + 2.8 percent is roughly equal to PRIME + 0.0 percent.
The best interest rates available are typically LIBOR + 2.0 percent and PRIME – 0.50 percent. It is usually better to have an interest rate tied to LIBOR. These rates typically grow more slowly than those tied to PRIME and could save you money in the long term.
Be aware that your interest rate may be introductory and may only last while you are in school and during a grace period. After that, you may be charged a higher interest rate.
Also take a look at the fees you can expect to pay. A lower interest rate may be offset by higher fees.
Repayment terms vary by lender and may depend on the size of your loan. Most lenders have maximum repayment terms of 15 to 25 years. More time to repay a loan will decrease your minimum monthly payments, but you’ll wind up paying more in interest. If you can afford to do so, pay more than the minimum balance due and get out of debt sooner.
You can consolidate private student loans. Terms vary depending on your credit score, income and other variables.
Maximum Loan Amounts
Some lenders have maximum loan amounts cap your annual and total borrowing amounts, regardless of your actual costs. Lenders may cap undergraduate loans at or around $30,000 a year. Cumulative or total loan limits are usually around $120,000 or $150,000 for undergraduate studies. Graduate and professional students have higher limits.
Other lenders allow you to borrow up to the full cost of your education. If that’s the case, your college or university will estimate the annual cost of attendance, including tuition, living expenses and other financial needs. Then you’ll be able to borrow up to that amount .
Specialized Private Student Loans
Federal student loans are not available for law and medical students after they graduate. These students can instead turn to private loans when they have further educational expenses.
A Bar Study Loan is given to law students to help pay for bar exam costs and living expenses while studying for the exam.
A Residency and Relocation Loan is designed to help medical and dental students pay for costs while they look for a residency and relocate.
Wherever you are in your education, private loans can help you finance the costs.