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Private Student Loans

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Private Student LoansThis is the second of a four article series on student loans.  This article covers private student loans.  The other articles cover the following topics: introduction to student loansfederal student loans, and choosing between federal and private loans.

If you must take out student loans, it’s important to understand your options so that you can borrow in the most appropriate and responsible manner possible.  Doing your homework on student loans can save you thousands of dollars in interest and fees over the life of the loan and possibly save you a lot of grief later on.

Below are some of the basic pros and cons of private student loans that you should be familiar with.

Pros of Private Student Loans

  • Those with excellent credit and/or a co-signer with excellent credit can receive very low rates and may even have their loan fees dropped since private lenders generally take risk of default into consideration.  For ideal borrowers, initial rates on a private loan can sometimes be much lower than those on a federal student loan.
  • Many students exhaust government loan alternatives and need to borrow more.  Private student loans may be a great option for these people.
  • Since most private student loans charge a variable interest rate, borrowers may benefit from a drop in interest rates.  Borrowers with federal student loans likely wouldn’t see a similar decrease in their payments.
  • You don’t have to fill out the Federal Application for Federal Student Aid (FAFSA), since it is only used to determine government aid.
  • You might be able to borrow more from a private lender than from the federal government.  There are limits to how much the federal government will lend you.

Cons of Private Student Loans

  • Most private student loans charge a variable interest rate rather than a fixed rate.  When rates go up, this could increase payments.  Having a variable rate loan means more uncertainty since there is no guarantee what rates will do over the term of the loan.
  • Many, but not all, private student loans require a co-signer, which could be a parent, grandparent, spouse, or other person.  This person could be on the hook for the entire remaining loan balance if the student were to die or was otherwise unable to make his or her loan payments.  Term life insurance may be a quick and inexpensive way to hedge against the student dying before the loan is paid off.
  • Those with poor credit and/or a co-signer with poor credit will likely be offered rather unfavourable terms.
  • There is generally less flexibility in the repayment of private student loans than there is with federal student loans.  If you can’t make your private student loan payments, check your loan agreement for alternative options and call your lender to explain the situation to them.

Comparing Private Student Loan Rates

Rates on private student loans vary widely by lender, so you can save yourself thousands of dollars by comparing multiple loan options.  

Many private student loan lenders won’t give full details of the terms of the loan until after an application has been submitted.  The teaser rate and terms may say one thing, but you won’t know the actual rate and terms you qualify for until you submit an application.

SimpleTuition is a site where you can easily research and compare private student loans to find the best loan possible for you. You simply enter the amount you want to borrow and some basic information about yourself and then the site displays a customized list of options for you.

Student Life Insurance

It may be wise to take out life insurance on the life of any student with private student loans.  Federal student loans will often times be discharged if the student/graduate dies, but private student loans may not, and a co-signer could be required to repay the loan.

Term life insurance is an easy, affordable way to hedge against such risk.  Quote Guardian is one free site where you can quickly and easily obtain quotes from a number of different insurance companies all at once.  Obtaining multiple quotes can help you find the best deal possible and save you quite a bit of money over the life of the policy.

Make sure you purchase enough life insurance coverage to cover the amount of the student loan debt.  You could probably get $100,000 of life insurance coverage on a typical non-smoking student for as little as $10 – $15 or so per month, making it a very inexpensive way to hedge your risk.

Consider naming the person who would be responsible to pay off your loans in the event of your death (i.e. co-signer, spouse, etc) as the beneficiary of the policy so that they can receive the cash directly from the insurance company.  You can always change the beneficiary of the policy or even drop the policy later on if you so choose.

Additional Student Loan Information

For additional information regarding student loans, you might take a look at the below books:


What has been your experience with private student loans?  Leave a comment below!

Image: mybaitshop/bigstock

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{ 2 comments… add one }

  • JN January 14, 2013, 3:26 am

    This was very helpful as my husband and I have both incurred a lot of student loans over the past few years.

    Reply
    • LD January 14, 2013, 9:09 am

      Glad you found it useful JN. Over the next few weeks I’ll be putting out an article on federal student loans as well as one on choosing between federal and private student loans. You might also take a look at my article on getting out of debt: Personal Finance – Loans and Debt – How to get out of debt.

      LD

      Reply

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