Private Student Loans Are Completely Different To Federal Student Loans
True, both loans provide money for education, but beyond that, there isn’t much similarity. Federal loans will have a fixed interest rate and offer many more benefits to the borrower, such as deferment, forbearance, the ability to consolidate, and even forgiveness for certain circumstances. There are also several different payment plans, many of which are designed to be tied to your income after graduation. There is also the federal loan rehabilitation program, which is an opportunity to fix credit mistakes of default when it comes to these loans.
Private loans aren’t nearly as flexible. They are offered by institutions and have variable interest rates, also requiring a credit check. Because of this, your credit history will be crucial, and you may end up needing a cosigner to qualify for educational expenses. In addition, the interest rate could end up being rather high as the loans will more than likely fluctuate as far as interest rates are concerned. You also have far fewer alternatives for payback with private loans.
Payment Scheduling Can Be Different
When you are using a private student loan, the repayment schedule could be quite different. In fact, some of them will require you to pay back the loan while you are still in school, unlike the federal student loan, which gives you a grace period until graduation.
Because of this, private loans are typically the last resort for students, and quite often are used by people going to graduate school that are already working in their field and have exhausted all of their federal student loan qualifications.
What Are the Fees?
Private student loans can also have fees, such as origination fees, late payment fees,and many other extended costs. It is because of this that you will need to make sure you read through the fee schedule and understand if there are any exorbitant costs when it comes to borrowing from these lending institutions. Remember that the fees are not going to be the same at each bank, so you will need to pay quite a bit of attention to any lenders that you speak to.
Some lenders will have deferment programs, but unlike the federal program, there can be fees attached to doing this, which would only dig the financial hole that you are in much deeper.
There are even some student loan companies that will tell you they can get you the best interest rate and loan terms, but you need to pay a small fee upfront for the service. It can be anywhere from 1 to 5% of the loan amount, or sometimes, it will be a flat fee upfront such as $1,500. This is a common scam, and a way to simply bilk more money out of the public.
There are also other fees that can be found in these private loans, especially when it comes to a significant amount of added cost when paying back. For example, some collection fees can total as much is 40% of the loan! If you have a $20,000 loan -something that’s very easy to rack up these days - you would be talking about an$8,000 fee for going into default. This is a very serious place to find oneself, as I’m sure you can imagine.
Look For ‘Free Money’ First
You should always see if you qualify for scholarships or some type of grant before financing your education, be it through federal or private loans. This is especially true when you are talking about private loans though, as they do tend to cost more in the long run.
Based on this, you should be thinking of private student loans as a last resort, and you should also make sure that there aren’t other alternatives that you have forgotten.
You would be stunned if you knew how much money is simply sitting around waiting for somebody to claim it. Doing a bit of research can save you a fortune down the road.
Make Sure the Education Is Worth It
If you are going to use a private lender, you need to ensure that the education will be worth it. For example, a master’s degree in nursing might only pay $10,000 more than a bachelor’s degree, but a master’s degree in engineering might be a $60,000 difference.
Obviously, it’s easier to make the argument for the master’s degree in engineering being financed through a private loan. It’s a simple matter of numbers and the amount you will need to pay back at the end.