An Introduction to Private Student Loans

Posted on January 14, 2009
Filed Under Student Loans |

Private Student Loans are loans made by financial institutions like banks to students. What makes these loans private is that it is only between the student and the bank. Private student loans are not guaranteed by the government or any of its agencies.

Advocates suggest that private loans made to students combine the best of all the various government loans into one single loan. Higher loan limits are generally offered compared to Direct-to-student federal loans. This can be a great help for students on a budget.

Private loans made to students also generally offer a grace period, so the student does not have to make any payments until sometime after they finish graduating. Government loans made to the parents of the students have NO grace period. Although the grace period offered by private lenders is usually 6 months after graduation, this period can range as high as one full year.

Interest rates are also lower than regular non specialized loans like “signature loans”. On the other hand, private student loans are a little higher than those provided by the government. Legislation is pending to raise government loan rates to be on a level playing field with private lending institutions. Confirmation of this should be researched by the student.

Most private loan programs are tied to one or more financial indexes, such as the Wall Street Journal Prime rate or the BBA LIBOR rate, plus an added overhead charge. This overhead charge will depend on the credit history of the student applying for the loan. The better their credit history, the less the overhead charge, as well as lower loan origination fees, which is a onetime charge based on the amount of the loan. The borrowing student often has the choice of either paying the charge or having it added on top of the loan amount.

If the student has a high credit score of at least 800, they may be able to get a low-interest loan with no fees at all.
When shopping for student loans, the student should compare all the terms and conditions, including the rate to determine the total amount of the financing costs of the loan.

There are usually two types of Private Student Loans:

Distribution of funds for students is much easier for private student loans compared to Federal student loans as the money is generally disbursed by the lender directly to the student’s school of choice. A great advantage for the student is that their risk of borrowing more money than they need for their education is lessened. They are also protected from spending their education funds on inappropriate expenses.

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