Students and parents in the United States see education as a great leveler among the “haves” and “have nots” in their collective drive to achieve the so-called American dream.
While priority on education is enshrined in the Constitution through free access to public education up to high school, the United States government, still mired in an economic crisis, has been struggling to provide funds to help families cope with the rising cost of college education. This is usually done through federal-funded scholarships and financial aid in the form of loans to deserving students, based largely on financial need, dependency status and academic achievement.
Not everyone is eligible though, or meets the qualification standards set for federal-funded grants or loans. Or, for some students, the grant they are able to access may not be sufficient to cover their college costs. If you happen to be one of those, you don’t have to despair over the possibility of a dream going bust.
If you’ve studied all possible options and are ready to consider going for a student loan to augment your college fund, it’s good to know that the government is not your only source.
Private Student Loans Program
Banks and other financial institutions providing private student loans grant as much as $50,000 to qualified student loan applicants. This means that you just have to show proof of your capacity to pay back your loan or can issue a security or collateral for the loan.
The loan is packaged by banks as a financing option for college and postgraduate education in the United States to supplement federally guaranteed loans, including Stafford loans, Perkins loans and PLUS loans. You can apply for a private student loan to finance all your college requirements, or to supplement a scholarship or financial assistance from the federal government, if your loan from the latter is not sufficient for your needs. Check here to to learn more on how to Pay for College.
Private student loans are managed by banks and other private financial companies, which means they have invariably higher interest rates than loans guaranteed by the federal government through the US Department of Education. They usually do not carry the same safety net provided by federal loans to protect students, including payment deferment in case of prolonged unemployment, income-based repayment, and loan forgiveness when needed.
But if you’re anything like most of the average American students, you’re likely to be granted the loan anyway to pursue your dream to finish college and to assure a more stable future for yourself. Last year, about 66% of students across the United States availed of this facility from private banks and loan companies, like Sallie Mae, Wells Fargo and many more. Graduating students reportedly borrowed an average of $25,250, although the maximum loan can be as high as $50,000 per student as long as the loan is backed by collateral and co-signed by someone with sufficient credit ratings.
The idea is to keep your loan to a minimum. After all, you will have to pay for this loan sooner or later.
How to Avail of Private Student Loan
To be eligible for a private student loan, an applicant must be or have the following basic requirements, and be able to show the bank proof of these:
• US citizen or permanent resident
• At least 18 years old
• Valid social security number
• You and your co-signor should pass credit check
In view of their limited income and credit history, undergraduate students are advised to apply with a co-signor with a good credit rating to increase their chances of approval and to acquire a lower interest rate. Loan borrowers and co-signors with high credit ratings can obtain lower interest rates than those with low credit standing.
Another eligibility requirement is your acceptance and attendance in an accredited community college or university. The bank will verify your enrollment after you’ve submitted your application along with the required attachments.
Always remember that private student loans are managed by banks and financial companies operating for profits. Although this type of loan used to be unsecured or uncollateralized, banks are now requiring borrowers to offer collateral or a third-party guarantee of payment from a co-signor. This new practice was adopted recently because of the economic crisis that engulfed and continues to engulf the entire country.
If you can have access to federal-funded loans and other forms of financial assistance, then by all means use that component of the funding first before considering getting a private student loan to supplement your college expenses. Government loans have fixed rates and are not as exorbitant as privately sourced funds.
Interest rates are not standard across all lenders, who usually base them on their perceived risks on a particular borrower. This usually comes unfairly high for you because you’re not likely to have a credit history that would support your creditworthiness. After all, you’re just a student and your paying capacity is yet to be determined in the next four years or more.
Repayment Terms
In their desire to have their loan application approved, many students fail to consider the payment options available to them at the end of their course. After all, what could be a better time to negotiate for a better repayment deal than when still negotiating for your loan, when you have not yet tied yourself to the bank with a binding contract.
In some cases, you don’t even need to negotiate for a good repayment deal anymore because some banks provide for attractive repayment options. All you need to do is ask the bank’s representative to explain them to you before you make a choice. You’ve got to study these options carefully because chances are, and obviously, the bank will try to push for the option that is most advantageous to them – and not so advantageous to you.
The most common options available to you are full loan deferral, interest only repayment, or immediate interest and principal repayment.
Under a full loan deferral, the lender will not collect principal or interest payments while you’re enrolled up to four consecutive years. Payment of principal and interest will begin six months after graduation. The accrual method will be applied during the deferment period of six months and will be added to the loan at the time of repayment. This is probably the best arrangement for a full-time student with no regular income during college years.
If you have a part-time job while enrolled, you can opt for interest only repayment. This means you can start paying for the interest while still enrolled. You can pay the principal 45 days after graduation. This spells a substantial reduction of your monthly loan payments after graduation.
Immediate interest and principal repayment mean you need to pay the principal and interest after the loan is fully disbursed. This scheme may not be in your best interest, but the bank might just place you in this category if you don’t exercise your option.
If these options are not available in your bank, then you can try another one. Some banks offer deferment options in cases of economic crisis, unemployment, and other dire circumstances. It’s best to ask your potential lenders for their list of deferment options before making your choice.
The actual repayment terms for private student loans ranges from 10 to 25 years. The rule of thumb is that the higher the loan amount, the longer the terms. Just remember that longer repayment terms doesn’t always spell good news. Always keep your pen, paper, and calculator handy when visiting your lender and make certain calculations yourself. Sometimes, an additional $5 or $10 in monthly payments could translate into a shorter period of repayment.
Just like home amortizations, you can request for loan consolidation once you’ve begun repaying your loans. Consolidation allows bank borrowers to refinance their loans to increase the length of the repayment, thus lowering monthly payment. If you have been paying your loan religiously, then you could also qualify for a lower interest rate during consolidation.
Looking ahead
Banks and financing companies offering private student loans expectedly do not always have your best interest in mind.
They seem to relay the message that it’s much easier for students to obtain a private loan from them than a federal agency. In reality, however, they conveniently forget to mention that their loans lack fixed rates, consumer protection and flexible repayment options. You will need to bear this in mind when applying for the loan that would serve as your ticket to college education and a better life.
A young couple in Seattle racked up as much as $500,000 in student loans, inclusive of principal and interest. It was, by any measure, a dreadful way to start a career and should serve as a fair warning for anyone desiring to take out a private student loan from the bank. This is certainly a massive aberration out of the ordinary, but it has happened, and it could also happen to you.
While the availability of private student loan is unarguably a boon in your quest for college education and contributes to the development of a quality workforce for your country, care should be taken in your choice of banks to finance your education and in your choice of strategy, if you may call it that, to make use of the resources and options available to you to your best advantage.
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