- What are the differences between a federal student loan,
a private educational loan, and a personal loan?
A federal student loan is insured by the government and may be
offered under diferent program names, including: Stafford, William
D. Ford Direct, Perkins, etc. Federal student loans are not based
on credit, but on enrollment requirements and come with many benefits.
A private educational loan is offered by a lending institution,
is based on credit, and is not insured. Both federal and private
loans are for educational purposes.
A personal loan is also offered by a lending institution, such
as a bank or credit union. However, these loans may be used for
a variety of reasons, such as purchasing a car, remodeling a home,
or an education.
- How do I know if I need a private loan?
It's always best to limit your borrowing during school. So if
you find that the difference between your financial resources
(savings, income, financial aid, assistance from parents and relatives)
and the cost of education is too much to cover, then you may need
to consider a private loan. However, there are other reasons students
borrow private loans:
- Enrolled less than half-time
- Reached federal student loan maximums
- Additional expenses not covered by federal loans
- International student
- Lack documentation of legal U.S. status
- Exceeded limits of Satisfactory Academic Progress
- In default on federal student loans
- What credit score is required to qualify for a private loan?
Each loan has its own eligibility and credit requirements. However,
many private loans have a minimum credit score limit of 600 -
650. Keep in mind that the closer you are to the minimum score,
the higher your interest rate will be. This will translate into
higher monthly payments, costing you more money. The better your
credit score, the lower your interest rate. If you are concerned
that your score may be on the low side, order a copy of your credit
report and see if you can clean it up before applying for the
loan! (For more information on improving credit history and score,
see EdFund's Online
Money Management Library)
- Which loan would give me the best interest rate: one that
uses the T-bill, the LIBOR, or the prime rate index?
All private loans base their interest rates on an index.
The T-bill, LIBOR and prime rate are the most common indices.
The lender adds a margin
to the index to come up with the offered interest rate. Actually,
even though lenders use different indices, all loan interest rates
calculate out to be very, very similar. This is intentional, so
the lenders can be competitive with one another. See the example
below:
| Lender |
Index Used |
+ |
Marging |
= |
Interest Rate |
| Lender A |
T-bill (2.7%) |
+
|
3.90%
|
=
|
6.60%
|
| Lender B |
LIBOR (1.9%) |
+
|
4.72%
|
=
|
6.62%
|
| Lender C |
Prime Rate (2.25%) |
+
|
4.34%
|
=
|
6.59%
|
What would these differences in interest rate look like during
repayment? On a $20,000 private loan over a 15 year term, the
difference in monthly payment is $_____. So, really, it doesn't
matter which index the interest rate is based on. What matters
more is your credit history and score!
- What if I don't have good credit?
If you don't have good credit, you still have several options.
If you have some time before you are going to apply for the loan,
the best option is to order and review your credit report. There
may be errors or fraudulent activity showing on your accounts.
If this is the case, follow the credit bureau's instructions for
disputing the errors. If the not-so-good credit is due to the
way you've handled previous accounts, it's time to change some
habits! However, you may not have enough time to re-establish
good credit before you have to apply for the private loan.l In
this case, you might consider a co-signer.
- What if my co-signer doesn't have good credit?
It does no good to have a co-signer with bad credit. You'll either
end up with a higher interest rate or, at worst, be denied the
loan altogether. Consider your co-signer choice carefully. If
you absolutely can't find anyone with good credit to co-sign for
you, you may hve to apply and hope for the best. But don't forget
about other financing options! Have you applied for every type
of financial aid available? If you own a house, have you looked
into a home equity loan? If you are denied because your co-signer
has bad credit and you have exhausted all other options, don't
give up! You may just need to take some time off and clean up
your credit, so that you can qualify for a private loan.
Remember, an education is the most important investment of your
life and is well-worth the time and money!
- Will my private loan include deferment and forbearance options?
Some private loans come with repayment options, such as deferments
and forbearance.
Most private loan postponement options are for returning to school,
financial hardship, or unemployment. If you believe that this
may be important to you during repayment, be sure to include these
options in your selection criteria when choosing the loan.
- Will I have to make payments while I am attending school?
Most private loans come with a grace period that lasts throughout
your enrollment and extends several months after you leave school.
If your loan does not have a prepayment
penalty and you have extra money during school, you can make
payments to reduce the total amount that you'll owe after you
leave school. During your research and selection process, find
out whether the loans have a grace period or prepayment penalties.
- So how do I know which loan is the best one?
That's a difficult question to answer since it depends on your
situation. Of course, the interest rate and fees will be an important
part of your decision, as you want to pay as little as possible
to borrow the money. However, consider what other terms you may
need from the loan:
- Lower enrollment requirements?
- High borrowing limits?
- A grace period?
- A longer repayment term?
- Postponement options?
- Borrower
benefits?
Think about your own situation and make sure that the loan you
choose will work for you. Remember, you'll have this loan for
10, 20 or maybe even 30 years!
- Can I consolidate my private loans?
You cannot consolidate your private loans into a federal (FFELP
or Direct) consolidation loan. However, if you have multiple private
loans that you'd like to combine, you may be able to apply for
a private consolidation loan. Check with your lender to find out
if this option is available to you.
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