Private Student Loans - What You Need To Know
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Private Student Loans: Essential Information
Summary
Private student loans should be your last resort for financing college expenses, as they typically cost more than other financing options.
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For college students, financial aid packages often fall short of covering the full cost of education. Schools determine eligibility for federal grants and loans, such as Stafford Loans, Perkins Loans, and Pell Grants, based on your FAFSA (Free Application for Federal Student Aid). These options are typically the first to be included in your financial aid package.
Eligibility for state and college-specific grants and scholarships is also determined through the FAFSA. While you can accept or reject any grants or loans offered, it's usually wise to accept government loans due to their lower interest rates compared to private student loans.
After accounting for all scholarships, grants, and federal loans, you might still face a financial gap. At this point, private student loans, or alternative student loans, may be your only viable option, though they are provided by private lenders.
One significant difference between private and federal loans is that private loans depend heavily on your credit rating. A good credit score results in lower interest rates and fees. If your credit score is low or nonexistent, a creditworthy cosigner can help secure a better rate.
It's crucial to understand the terms of your private loan, as they vary by lender. Repayment might start immediately or be deferred until graduation. However, interest begins to accrue immediately, increasing the balance until you start payments. Some lenders allow interest-only payments during school to reduce future payments. Discounts may also be available for setting up automatic payments or making consistent on-time payments.
If you have a cosigner, they should be fully aware of the implications. If you can't make payments, they will be responsible, affecting their ability to secure loans due to a higher debt-to-income ratio that appears on their credit report.
Ultimately, if other financing options are available, private student loans should be avoided. If not, a strong credit rating or a cosigner can help secure better rates and terms. It's wise to contact several lenders to compare interest rates and payment conditions.
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