Scrambling for college funds-Applying for private loans
Adapted from “The Washington Post”.
For College-bound students, easy money seems to be everywhere. Some websites quote that student’s loan can help cover up to 100 percent of college tuition, housing, books, and more. Its quick, easy, and free to apply.
It’s tempting marketing for cash-strapped students and families, who may be scrambling to figure out a way to cover any remaining college costs as the fall semester approaches. However, the student loans offered by banks and credit unions have key differences from Stafford loans, which are issued by the U.S. Department of Education.
Private student loans are widely considered an option of last resort only after federal loans, scholarships, and grants have been exhausted. Private loans tend to be more expensive, and come with fewer safeguards. Still, students and families might feel there are no other options this late in the game when they are already on verge of finalizing things.
The average bill comes in at more than $17,000 a year . Many private schools cost over $50,000 a year. Well, before you apply, there are a few pointers which should be remembered.
The low interest rates that banks dangle in front of borrowers online can seem like a steal, but keep in mind that those advertised rates are reserved for well-qualified borrowers. These rates are often variable, and can be as low as 1.5-3.5% . In addition,variable rates rise in tandem with market rates. Some private lenders also offer fixed rates, which may make more sense for some families.
By contrast, the rate on federal system loans is fixed at 6.8% over the life of the loan, regardless of a borrower’s credit score. To get the best rate on a private loan, a parent will likely need to co-sign for the loan, since students generally have very thin or non-existent credit histories.
One way to reduce costs is to chip away at the loan while in school, rather than waiting until after graduation to start repayment. This is critical, as interest continues to accrue during those years.
The interest rate shouldn’t be the only concern while taking out a private loan.
With federal student loans, borrowers who are unemployed or suffering economic hardships can opt to defer payments. Eligibility for the program is determined by weighing the amount owed against income.
There is no similar program with private student loans, but for those who are struggling the lender may, in rare cases, reduce interest rates or minimum payment amount to make the monthly payment more manageable.