Over the past few weeks, we've reviewed all of the federal loans available to students and parents, but commercial banks and credit unions also offer loans to help students pay for their education. These loans (commonly referred to as private or alternative loans) are quite different from federal student loans. So what's the difference? Read on!
Reasons to Borrow Federal Student Loans First
We highly recommend that you borrow your full eligibility of Direct Subsidized/Unsubsidized loans—and your parent considers borrowing a Direct Parent PLUS loan—before borrowing a private education loan. Here's why:
- Interest rate: Historically, private student loans have typically had higher interest rates than federal student loans, and many have variable interest rates (unlike federal loans, which have fixed rates).
- Repayment timeline: You do not have to start repaying federal student loans until you graduate or are enrolled less than half-time (below 6 credits). Some private loans require payments while you're still in school.
- Repayment plans: Federal student loans have many repayment plan options, including plans that base monthly payment amounts on your income. Most private loans have very limited repayment plans available.
- Forgiveness options: You may be eligible to have a portion of your federal loans forgiven if you work in public service. It's highly unlikely that your private loan lender will offer any loan forgiveness plans.
Find a complete summary of the differences between federal and private loans on the Federal Student Aid website.
Reasons to Consider a Private Student Loan
In a small number of situations, a private education loan may be a better option. Reasons to consider a private loan include:
- Repayment responsibility: Private loans are typically borrowed by the student (usually with a cosigner). This means the student is responsible for paying back the loan (unlike a Parent PLUS loan where the student has no repayment responsibility). This has the potential to improve the student's credit.
- Overall cost: If you have good credit, and can obtain a low interest rate, it may cost you less over the life of the loan. This depends on repayment options, length of repayment and total borrowing, however.
- Non-traditional enrollment: Unlike federal student loans, you may be able to borrow a private loan if you are enrolled less than half time or need to pay for courses taken during the interterm (these courses are not eligible for federal aid).
- Parent PLUS loan unavailable: If you are considered an independent student (according to the FAFSA), or your parent is unable or unwilling to borrow a Parent PLUS loan, a private loan can help cover your educational expenses.
Private Education Loan Terms:
|Private Loan Terms:
||Typically a commercial bank or credit union
|Maximum Loan Amount:
||Up to your cost of attendance, minus all other financial aid.
||Can be fixed or variable; depends on lender and borrower credit. Variable rates generally range from 2.25% to 10%; fixed generally range from 5.25% to 14%.
||Varies, but most private loans do not have upfront fees.
|Requirements to Receive Funds:
||All private loan lenders require a Self-Certification Form; some may have other requirements, such as half-time enrollment.
||Typically 6 to 9 months, depending on lender.
||Typically between 15 and 25 years, depending on lender.
||Depends on lender and amount borrowed.
Our Preferred Private Loan Lenders
To help you find the best loan option, our office researches and evaluates many different lenders every year. We search for companies who provide the most competitive loan products for students, and those lenders are chosen to appear on our preferred lender list. The lenders on this list are chosen because of a variety of factors, including available borrower benefits, zero origination or repayment fees, and competitive interest rates.
Our preferred lender list is hosted by FASTChoice. This site will help you learn about your options and understand your responbilities, and allows you to compare lenders side-by-side according to overall cost, interest rate and repayment benefits. We encourage you to visit FASTChoice first if you are considering a private education loan, but we will certify a private loan from any lender you choose (even if they don't appear on our list).
Applying for a Private Loan
If you decide that a private education loan is the right choice, you will need to apply directly with the lender you have chosen. A credit check is always a part of the application process, which may include an evaluation of your credit score and debt-to-income ratio (depending on the lender). You will also be required to complete a Self-Certification Form. Once you apply, the lender will send us a request to certify your eligibility for the loan. If we are able to certify it, the loan will be added to your existing financial aid package.
Please note: We will not begin certifying these loans for the 2014-15 academic year until June. Therefore, you should wait to apply for a private loan until that time.
Receiving Your Private Loan Funds
As with all other types of financial aid, private loan funds will first be sent from your lender to the Bursar's Office at DU (who is responsible for the collection and billing of tuition-related charges) and will then be applied directly to your University bill. If any additional funds remain after the bill has been paid in full, they will be refunded to you directly.
Important Tips to Consider
Choosing the right loan to help pay for your education is an important decision, and you should carefully review all details before selecting a private loan program. Here are some additional tips to help you make the best choice:
- Exhaust federal loan options. As we mentioned above, more often than not, Federal Direct loans (including Parent PLUS loans) have more favorable terms for borrowers. So exhaust those options first. But, if you do decide to pursue a private loan...
- Compare, compare, compare! Private loans vary significantly in repayment features, eligibility criteria, and borrower benefits. Download our loan comparison worksheet to help you thoroughly evaluate each lender you may be considering.
- Apply with a cosigner. Many times, it's better to apply with a cosigner, even if you could qualify for the loan on your own. Applying with a cosigner usually results in a lower interest rate, because the loans are not as risky for the lender.
- Pay attention to fees. The fees charged by some lenders can significantly increase the cost of the loan. A loan with a relatively low interest rate but high fees can ultimately cost more than a loan with a somewhat higher interest rate and no fees. A good general rule is that 3% in fees is about the same as a 1% higher interest rate.
- Only borrow what you need! This may seem obvious, but many students will borrow up to their total cost of attendance, even if they don't need to. Be sure that if you decide to apply for a private loan, you are only borrowing the absolute bare minimum you need to pay for educational expenses.
- Think long term. Remember that if you need to apply for an additional loan during your first year at DU, you'll likely need to borrow additional loans over the next 3 years. Loan debt can accumulate quickly; if you get in over your head, you may have trouble getting approved for a car loan, a credit card, or a home mortgage after you graduate!
Trying to understand the differences between your student loan options can be challenging, but we're here to help! Please don't hesitate to talk to one of our advisors if you have questions.
Up next week: Accepting Your Aid and Next Steps
Want to review past Financial Aid 101 emails? Check out the archives!