Students seek out private loans for college to pay for expenses uncovered by scholarships, federal grants and other types of student aid. When a high school graduate looks at college, he or she often faces a huge, very daunting financial wall. Tuition and expenses for universities have increased annually, at a much greater rate than most families' annual salaries. In the meantime, with the increased cost of living, many parents are choosing not to assist or to provide less funds for their children's continuing education. Work-study programs are limited and often pay very little. Even with a full scholarship, students need money to cover additional expenses, such as housing, food, books, computers and other needed supplies. This increased gap has forced parents and students to look for alternative sources of financing education. The importance of education is beyond debate. "Children in whom was no blemish, but well favoured, and skilful in all wisdom, and cunning in knowledge, and understanding science, and such as had ability in them to stand in the king's palace." (Daniel 1:4) Private loans for college have recently soared in popularity, meeting this growing demand.
Unlike federal loans, which base awards on the financial needs of the applicant, private loans are credit based. Lenders look very closely at a student's credit history and scores. An applicant must have a minimum of 27 months of credit history in order to even be considered for private loans for college. Since most students enter college within a year after graduation, many have little or no credit history. However, independent financial institutions will consider a student like this if he or she has a valid co-signer who has a stellar credit history. By co-signing on this contract, that person holds responsibility for repayment if the student defaults or can't pay the installments required upon graduation. Also unlike federal financing that can be taken out for small amounts, private loans for college usually have a minimal amount that can be borrowed. This figure varies among institutions, but should be considered before deciding to borrow from independent financial institutions. Another difference is in the distribution of the loan. While government organizations disperse federal monies directly to the school, independent foundations often mail funds directly to the student. Money can be used for anything related to the student's education including room and board, books and computers, transportation or other living expenses that might occur while in school.
Many types or organizations offer various private loans for college to students and their parents. Sallie Mae, one of the most well-known financial aid institutions for colleges and universities, offers several different types of private financing, including the Signature Student Loan, the Tuition Answer Loan (enabling students to borrow between $1,500 and $40,000 per year), a Signature Student Loan specifically designed for students enrolled in community colleges, a Continuing Education Loan, and a Career Training Loan for students enrolled in technical or trade schools. All financing is credit based; students with higher credit ratings receive lower interest rates. Borrowers also have no prepayment penalties and have some flexibility in repaying what they have borrowed. Other organizations such as banks, credit unions and other independent financial institutions (Astrive Student Loans or Chase Student Loans) offer similar financing options for education.
Private loans for college are a great option for students who have exhausted every other financing opportunity and need extra funds to fill in the gap of their educational expenses. These lenders usually allow students to use the funds to cover more expenses than their federal counterparts. Applying is quick and easy and can usually be done online. The FAFSE application for all federal loans can be time consuming and take longer for approval. However, interest rates for private loans average much higher than government-sanctioned financing - ranging from 4-6% for applicants with stellar credit ratings to 20-30%, higher than many credit cards. Compare that with the fixed federal rate of 6.8%. And with higher minimums, students can easily borrow higher amounts from these independent foundations. More and more, state government officials are trying to regular private loans for college, pushing for caps on interest rates, full disclosure on rates, fees and penalties, and allowing borrowers 30 days to consider an offer without terms changing and three days to cancel. However, these lenders also do offer unique incentives for approved borrowers. Even students with solid credit histories often choose to use a co-signer to lower interest rates. After 48 months of regular payments after graduation, the borrower can sign a co-signer release, releasing him or her from all responsibility. Lenders also give students breaks in interest rates for graduating and improving their credit scores along the way. But in the end, students can end up paying double or triple the amount than they would through federal alternatives.
Independent lenders also allow more flexibility in repaying what was borrowed. Students can choose to begin making full payments while still at school, interest only payments while in school, or defer the complete amount of the loan until six months after graduation. Interest continues to accrue during this grace period and is added to the principal amount when the first installment comes due. Payments can also be deferred in case of an emergency or financial setback, but like the grace period, interest continues to accrue. Average payment installments are $50 per month for up to 25 years on private loans - a longer period of time than federal terms which average 10-20 years.
Private loans for college comprise about 10% of all financing for colleges and universities, according to Nellie Mae. Because many offer outrageous rates and promises, it is important to research organizations before signing on the dotted line. The best place to start is the school's financial aid office. Most schools and universities already have contacts with independent organizations that will assist students. Borrowers can also check with their parent's bank or credit union to see if it offers any special educational financing. The Internet is a great tool to search for details on all lenders and financing plans. Most websites will list all pertinent information from rates and fees to minimum amounts to borrow. Go in prepared to find the best deal available.
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