Private Student Loan VS Federal College Student Loan
As the cost of a college education continues to rises, and federal college student loan limits fail to keep up, the private student loan business has grown very quickly. These private college student loans are used to fill the gap between available federal financial aid assistance and what students and families can afford to pay out-of-pocket for higher educational costs. However, these private student loans lack the more affordable, fixed interest rates, and flexible repayment options that federal college student loans will have. Prospective borrowers should exhaust all federal grant and federal college student loan options (including PLUS loans) before considering any private college student loans.
Banks and other financial institutions will make private student loans without any financial backing from the federal government. Interest accrues on all private college student loans from the time they are disbursed, although interest costs can sometimes be deferred and capitalized when you are ready to begin repayment. There are many different types of private student loans, each program with its own rules and specific requirements. Private college student loans are also called private label or alternative student loans, and are often provided by the same lenders that also will provide federal FFEL student loans. Because the government will not subsidize private college student loans, the rates and terms are not regulated the way they are for federal college student loans, which makes private student loans more risky and expensive.
What kind of interest rates, fees, and cash limits will you receive? Private student loan terms and conditions, including interest rates and fees, will generally be based on your credit history or your co-signer’s credit history. This means that low income students or those with some negative credit histories will likely receive college student loans that are more expensive. Like government college student loans, private student loans are supposed to be used specifically to finance postsecondary education (including books, transportation, and room and board). You will need to check your school’s estimated cost of attendance and consult with the federal financial aid assistance office before deciding on a private student loan amount.
Private student loan lenders may pressure or even require you to get a co-signer. A co-signer is someone such as a relative, friend or someone else who agrees to be responsible for your debt. Co-signers must understand that they will become responsible for paying back the debt just as if they have received the money.
There are a few very important differences between government college student loans and private student loans. If you take out a private student loan, you will not be eligible for the same types of discharge options available for federal financial aid student loans. The same will be true for deferment and forbearances. It is very important that you read your student loan contract very carefully to learn about your private student loan’s particular terms, conditions, benefits, rates, fees, and penalties. Private college student loan lenders will have to honor any promises they make about terms and benefits.