Private loans can help make grad school a reality
Tuition, books, fees, living expenses—the cost of going to graduate school has never been higher for today’s student. Paying for graduate school with just the help of federal loans doesn't always do the trick. In some cases, students must turn to private loans. Private loans are another way to help pay for graduate school, and like federal loans, they come with their own set of advantages and disadvantages.
The main difference between federal and private loans is that private loans (also known as alternative loans) are not funded by the government and are provided by private lenders. These lenders can be banks, credit unions, or savings and loans associates.
Many experts recommend exploring federal loan options first before considering a private loan for education. In other words, if you have a need to supplement your federal aid package, then private loans may be right for you.
For example, a graduate student can receive up to $20,500 a year in a Federal Stafford loan program, while a health professional student can receive up to $38,500. There is a total limit for Stafford loans (currently $138,500) and this can create problems for some graduate students.
"Students should only turn to private loans when they've exhausted all federal loan options," says Allesandra Lanza, corporate public relations manager for American Student Assistance. "Because fees and interest rates can significantly increase the cost of a loan, it's important to read the fine print when comparing private loans. Typically, private loan repayment terms don't offer the flexibility of federal loan programs."
In addition, this year a credit crunch has affected some private loan lenders. "As a result they are tightening credit requirements and raising interest rates and fees for some high-risk or sub-prime borrowers at certain schools," says Lanza.
There are two types of private loans: certified and Direct to Consumer (DTC). Certified private loans mean the school certifies the loan and the money goes directly to the school (which usually makes the cost of the loan cheaper). DTC private loans allow the money to go directly to the borrower which makes the loan more flexible, but often more expensive.
"After you exhaust your federal options, determine what you need and apply for a private loan," says Mylan Beauford, manager of publicity and promotions for Fanscape. "Borrowers should try to get a certified loan as they are usually less expensive in terms of fees, rate, and payments."
Not everyone pursues federal aid—in some cases private loans are entirely preferred. According to estudentloan.com, "there are many student/family situations where a private loan is viewed as a preferred alternative. Sometimes parents want their student to be responsible for his or her education. In other cases, the convenience of needing no federal forms to get needed funds is also a consideration."
When you are ready to seek out a private loan, start this process by talking to someone at the financial aid office of the school you attend or plan on attending.
"Your financial aid officer is the best resource to learn about your private loan options," says Scott Prince, vice president of marketing for The Education Resources Institute, Inc. (TERI), a guarantor of private loans for education in Boston, Massachusetts. "Schools often carefully select the best programs to meet the needs of their students. Loans that are school-certified often have better rates and fees than those that are not."
Prince says that it is imperative to shop smart for a private loan to avoid being left in a sticky (and expensive) situation. "Shop around and compare rates," he says. "Don't decide based on something in the mail, on TV, or through Google."
Here are the most important factors to consider when choosing a private loan:
- Interest rate: Is it fixed or variable? Know that interest rates can and do change over time. Private loans often have higher interest rates than federal loans.
- Application fees or other changes: Most private loans have origination fees which can be as high as 3%, but it is possible to find a private loan with no origination fee.
- Borrower benefits: How do you get and keep them? For example, interest rate reduction for automatic payments.
- Deferment: When do payments begin? When is the interest capitalized? Depending on what type of school you are in, the amount of time you can defer payment varies. For example, a Chase Private Education loan requires you to begin repayment of principal and interest six months after graduation with a $25 minimum monthly payment.
- Loan limit: How much can you borrow? Generally, private loans do not have limits and are established based on the amount set by the school. For example, a Chase Private Education Loan has an annual maximum borrowing limit of $40,000 or the estimated cost of education.
- Eligibility: Another major difference between federal and private loans is eligibility. While Federal PLUS loans require a credit check, most other federal loans do not. Private loans often require strict credit checks. U.S. citizenry is another factor for eligibility, as some private loans do not require you to be a U.S. citizen, while federal loans do.