Information on Private Education Loans

You may have asked yourself the following questions--What are private education loans? Are private loans a better deal than federal student loans? What should I know before I apply for a private loan?

Look at Other Aid First

Private loans (also called alternative loans) may be a viable way to fund your education expenses after you have exhausted other financial aid avenues such as:

• Federal, state, and institutional grants or scholarships
• Private scholarships
• Work Study
• Institutional Loans
• Federal Stafford Loans or Federal Perkins Loans
• PLUS loans for parents (if you are a dependent student)
• PLUS loans for graduate or professional students

Contact your financial aid office for information about applying for financial aid. If you have applied for all of these types of financial aid and still need additional funding to help pay for your educational expenses, a private loan may be an option you want to look at.

Shop Around for a Loan Deal

Private loans are offered by a variety of lenders (banks, credit unions, or lending corporations). Your eligibility for a private loan generally depends on whether or not you have good credit or have a co-signer with good credit. Your credit worthiness may also determine the amount you can borrow and the interest rate you are offered. Some lenders discount your interest rate if your are already a customer or if you agree to make payments through direct deposit to a checking or savings account. Some even offer a reduction in your loan principal or an interest rate reduction when you graduate. Some lenders advertise no up-front loan fees but charge repayment finance fees later. So make sure to consider these options when you're selecting a lender.

Most lenders have Web sites with private loan information and incentives. Do some comparison shopping to find the best deal on a private loan. To compare, use an arbitrary loan amount--$10,000, for example--and apply each lender's incentives, interest rates, and finance charges. Find out what the lender's policies are on lowering or postponing payments if you ever have trouble making your monthly payments. Once you have gathered this information and made your comparisons, you should be ready to make an informed choice about a lender.

How Much Can You Borrow?

It's always a good idea to borrow only what you absolutely need. When you start to repay the loan, it's too late to wish you hadn't borrowed quite so much. Unless the amount you are allowed to borrow is limited by bad credit, you probably want to borrow an amount equal to the cost of your education minus any other resources--money from your parents, any financial aid you are receiving, or income from a job. Your financial aid office should be able to help you determine what your education is going to cost per academic year.

What You Need to Know About Loan Repayment?

Interest begins accruing when a private loan is disbursed. Most lenders offer the following repayment options:

• Defer both interest and principal until after you graduate. Unfortunately if you don't pay the interest as you go, it is capitalized (added to the principal and accrues more interest)
• Defer the principal and pay the interest while you are in school. This is the better (and cheaper) bet if you can swing it

Make sure your lender offers both options, just in case you need them. Also make sure your lender doesn't charge a penalty if you pay off your loan early.

As with any consumer product, the more information you have, the better deal you can make when looking for a private education loan.

About the Author:
Judi Sandall is a graduate of the State University of New York, with a BA in English Literature. She is a technical writer and editor who worked in student financial aid for over 20 years.