Private Student Loan Benefits and Risks

Learn if private student loans are good way to get extra money.
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A private student loan is an option if you are having a difficult item paying for college. Private student loans can fill the gap if a Stafford Loan or Pell Grant does not cover the rest of your tuition. Private student loans work differently than federal student loans. You will apply for the loan and the bank will look at your credit worthiness. Often parents will cosign on a private student loan for you, or they may take them out for you.

How Do I Apply for a Private Student Loan?

You can apply for private student loans directly through the bank or you can contact your student aid office to find banks that work with the students at your college. Since the federal government does not regulate the terms of the loan, you need to carefully read the fine print and understand what your interest rate is, the payment terms and when payments will be due. Some loans may offer a small grace period after graduation, and some will not. Some of the private loans may require you to have a cosigner if you do not have a good credit score or any credit history.

What Are the Terms for a Private Student Loan?

The interest rate on private student loans is higher than federal student loans. The interest rate is usually the prime interest rate (which does vary) plus a set amount. The interest rate may be adjusted up if you are late for a payment, as well.

The banks may not be as willing to work with you to put your loan on deferment if you lose your job, and will still expect you to make monthly payments.

Should I Get a Private Student Loan?

Private student loans should be a last resort to pay for college. You should consider transferring to a less expensive school, working to earn extra money for college or only going part-time before taking out a private student loan.

Additionally you should make sure your degree will help you earn enough to pay back the student loan. For example, a teaching salary is not usually enough to manage both Federal student loans and private student loans. It can be more difficult to find forgiveness programs for private student loans, since several of the programs are designed specifically for federal student loans.

What About Graduate Students?

Graduate students often turn to private student loans to pay for graduate school. Since Pell Grants are not available to graduate students and graduate student tuition is higher, this may be the only option. Again it is important to make sure the degree is worth the increased debt load, and to live as cheaply as possible when you borrow the money, because you will need to pay it back when you graduate. Determine how much you actually need to make ends meet and stick to that budget when you borrow money.

I Need the Extra Student Loan Money. What Precautions Should I Take?

Before you take out a private student loan, you need to set up a strict college budget. It is often hard to think about how much the payments will be while you are still in school, but the amount that you borrow can negatively impact you in the years after graduation.

It can be daunting to think about how you will manage your loan payments. Be sure to take any loan counseling that is offered by your college, as well as making sure you have exhausted all other options when it comes time to pay for school. It is worth the extra time you spend looking for scholarships or working a part-time job to avoid graduating with student loan debt.