Financing a college education can seem like a daunting prospect for many families, especially when many educational institutions are struggling to maintain income, find ways to cut costs, and still keep their doors open. This is why more students and their families are turning to private student loans to make tuition ends meet. There are both advantages and disadvantages to taking on private student loans, but in many instances taking out a private student loan might be the solution you need to afford your college education.
Private student loans are loans provided by private financing institutions such as banks and credit unions to meet the financial needs that students may face when trying to afford higher education. While student loans typically offer student applicants lower interest rates and deferred repayment, versus traditional personal or business loans which may not offer these benefits, they can still leave a graduating student facing higher than manageable debt if not managed well and purchased thoughtfully. While not every student will probably require financial assistance from private student loans, they are a vehicle by which some students can now afford to college whereas before that was not possible.
How do Private Student Loans Work
Private student loans work by assessing the level of need a student has to afford the financial costs of higher education. Private student loans can be used to cover tuition, fees, and other expenses related to higher education that are not otherwise covered by other funding sources such as school-based financial or federal student aid. When a student borrows money through a private student loan, the most common practice is to have that student listed as the primary person on the loan, with a co-signer, who is often a parent or guardian. The student will usually be allowed to defer repayment until after graduation, and will have to go through a credit check before the loan can be granted.
The primary advantage for obtaining a private student loan is that having this investment option often enables a student to attend higher education classes, which might otherwise be financially impossible. The primary disadvantages outnumber the advantages, however. Primary disadvantages include that interest rates are often variable rather than fixed such as with other types of student loan options, and that interest rates also tend to be higher than what is found for federal funding. Additionally, while it can be tempting to borrow extra money than what is absolutely needed to afford higher education, this option can cause financial distress for the graduating student and their family, especially if a job is immediately hard to come by. The good news is that, with educational institutions cutting funding and states and the federal government following likewise, this means that more students must take out private student loans, and thus the competition amongst different lending agents for students' business is getting stiffer. Thus, with a little judicious shopping around, it can often be possible to find better rates and more attractive repayment options. Additionally, the necessity of student loans can also generate a more proactive attitude towards finding alternative sources of funding as well, such as applying for scholarships and grants from private organizations and foundations to supplement the costs of higher education.
To apply for a private student loan, the student will need to fill out the necessary paperwork with the lending institution and will usually need to provide a co-signer for the loan as well. The most important factor here is to select the best value in a private student loan for the student's needs. Here it can pay to use online quote generation and comparison tools to shop around and find the best interest rates and repayment terms for a private student loan. Also factor in how extending the repayment terms or deferring loan repayment until after graduation may affect a student's financial future wellbeing. Shorter loan repayment terms will reduce the amount repaid in interest and reduce the overall debt burden that the student may graduate to carry considerably. There are a number of estimator options that can allow you to compare how taking out a lesser amount with a shorter repayment period can save you literally thousands of dollars in repayment costs over the lifespan of the loan.