In this topic, we cover:
- Tips for selecting a private lender.
- Special considerations for parents.
When financing a college degree, federal student loans should be the first choice for student borrowers. They offer flexible repayment terms, affordable interest rates, and even offer loan forgiveness options in certain circumstances. But federal loans are subject to annual borrowing limits, which may not be enough to pay for school. So when federal loans are not enough, private lenders such as banks, credit unions, and non-profit lenders can help to fill the gap.
Choosing a lender is a personal decision based on your individual needs. Many schools have a "preferred lender list" made of lenders they feel offer a good combination of price and service. When comparing lenders and the loans they offer, here are some things to consider:
- Fees - What additional fees are charged by the lender? For example, some lenders may charge origination fees or late fees.
- Interest rate - What is the interest rate offered? How is the interest rate affected by your (or your co-signer's) credit score?
- Capitalization - Is the interest on your loan capitalized quarterly, annually or at the end of the loan period? The capitalization schedule can greatly affect your total debt. The more often your loan is capitalized, the more expensive it will generally be.
- Consequences of late payments - How will a missed payment or two effect your interest rate?
- Benefits of on time payment - Are there interest rate reductions for making on time payments, completing your degree, or making automatic payments?
- Co-signer release - Is a co-signer required for the loan? If so, does the lender offer a way for the co-signer to be released from the obligation over time?
- Customer service - Does the lender have an "800" number? Do they have an easy to use website?
- Deferments - Does the lender offer to defer payments if you choose to attend graduate or professional school?
- Prepayments - Is there a penalty for paying off your loan early?
The interest rates and benefits of private student loans can vary significantly from lender to lender, so it's wise to comparison shop.
Choosing your lender is a serious decision with long-term consequences. Overall, when comparing lenders, we suggest selecting the lender that offers good rates, fees and repayment options, along with a demonstrated commitment to education financing and customer service.
Private Loans for Parents
While the flexible repayment options of federal loans mean they're the first choice of most students, the situation may be more complex for parents - especially those with excellent credit or significant home equity.
The Department of Education's PLUS Loan is available to parents and isn't subject to the annual or aggregate limits of student loans. PLUS Loans also offer more flexible repayment options when compared with private student loans, including income-contingent repayment options if the loan is consolidated into a Direct Consolidation Loan. Further, parents working in public service may even be eligible for the Public Service Loan Forgiveness program after the PLUS Loan has been consolidated.
On the other hand, PLUS Loans have a significant disbursement fee (over 4% - that's four times the disbursement fee of student Direct Loans) and a fixed interest rate that may be higher when compared to private loans. In addition, parents with excellent credit and significant home equity may find that home equity loans or lines of credit offer lower interest rates than either PLUS or private education loans. So while a parent may be borrowing for higher education, it's wise to explore all loan options - even those not specifically intended for education financing.
