Need some extra money for college? You may hear about private college loans. They can be helpful to make ends meet, but there are other options you should consider first.
Borrowing is a reality for many families paying for college. But that reality can be less painful if parents and students understand how to be smart loan shoppers.
Get Federal Loans First
Surprisingly, many college students do not obtain the maximum federal loan amounts for which they are eligible. Federally guaranteed loans, which are offered through the college financial aid office, are usually the cheapest loan option. Interest rates are set at lower-than-market levels. If the loan is subsidized by the government, interest will not even start accruing until the student is out of school. So if you are thinking of borrowing, the first step is to file a FAFSA (Free Application for Federal Student Aid). At a minimum, you will be eligible for an unsubsidized Stafford loan. See our article Federal Education Loans for more information about these loans.
Then Consider a Federal Direct PLUS Loan
Federal Direct PLUS loans are available to parents of dependent undergraduate students and to graduate students. These loans are based on the borrower's credit rating and a completed FAFSA. The government insures the loan, sets the interest rate, and guarantees other benefits—such as lenient qualification requirements.
Parents apply for PLUS loans by filling out and submitting an application unique to the PLUS Program. This application is available from college financial aid offices and the Department of Education's student aid website. Repayment can be deferred until six months after the date the student ceases to be enrolled at least half time. See our article PLUS Loans for Parents for more information about these loans.
Look at Private Loans As a Last Resort
Once all cheaper loan sources have been exhausted, you might consider taking out a private loan. Unlike federal student loans, private student loans are not subsidized or guaranteed by the government. Their interest rates and terms are set entirely by the lender and will be influenced by the borrower's credit rating, not financial need. (A cosigner such as a parent may improve the credit rating used to calculate the loan terms.) Repayment may be deferred until after you leave school, but interest will start accruing as soon as you receive the loan money.
Shop Around for the Best Private Loan Offer
Do some solid homework before choosing a private lender. The more you shop around, the more likely you are to find a good deal. Lenders offer various inducements to get business, including interest rate and fee reductions.
Where to start? Many colleges provide lender lists. Don't hesitate to ask how the lists were developed. They should be based on the college's good experience with the providers. The college may have also negotiated favorable terms for the benefit of students. Another checkpoint is the state office of education. Some states provide low-cost loans for state residents and out-of-state students. Checking with your family's bank or credit union is another option.
Questions to Ask Private Lenders
The Project on Student Debt suggests that borrowers compare lenders by asking the following questions:
- What is the lowest interest rate and fee combination that you offer? How can I get that rate? Is the rate for a limited period (an introductory rate) or for the duration of the loan?
- If the interest rate is variable, is there a limit on how high the rate can go? How often is the rate adjusted, and how is it determined?
- What rate can I get on a fixed-rate loan?
- How long will I be repaying the loan? Is there a penalty for paying off the loan early?
- When do I have to start making payments?
- How long can I defer payments while I am in school? If I do not make payments while in school, how much will I owe when I do start making payments?
- Will I lose my on-time payment discount with just one late payment or if I ask for a change in the payment schedule?
- What proportion of your borrowers actually get the discounts you offer?
- Are your discounts guaranteed, or are they subject to change later?
- If I have difficulty making payments (economic hardship), may I defer or reduce my payments temporarily? Under what circumstances and for how long?
- How much can I borrow without reducing my eligibility for federal, state, or institutional aid?
Processing and Terms of Private Loans
Lenders may make private educational loans through college financial aid offices, through partner lenders, or from their own offices. The maximum amount that may be borrowed is typically the total educational expenses minus any aid the student received. Like consumer loans, the fees, interest rates, and other terms of private loans are tied to the credit qualifications of the borrower and cosigner, the number of years allowed for repayment, and when repayment begins. In all cases, interest begins accruing immediately—even if repayment is deferred.
When a Private Loan Appears in the Financial Aid Award
The college financial aid office sometimes disburses private loans, so they may appear in a financial aid award. If such loans show up in an aid offer, they don't have to be accepted. Again, the student is free to find another provider, so shop around to get the best deal.
Alternatives to the Alternatives
Many other loan options are available to make college more manageable for a family, including borrowing against a home, insurance policies, retirement savings, and investments.
A Word of Caution
As easy as it may be to take out an education loan, it may not be so easy to pay it back. Think carefully about the level of debt you think you and your family can afford once you graduate.
Note: Financial information provided on this site is of a general nature and may not apply to your situation. Contact a financial or tax advisor before acting on such information.
