Questions to Ask About Private Student Loans
Private student loans may not be the best option for individuals seeking for how to finance their education. This is due to their high interest rates and other terms which are not that friendly when compared to what is obtainable with federal student loans. That is why it is better to make private student loans the last resort after you must have tried all other options. Federal student loans should have been the ideal for all students but the problem is that the amount of the federal student loans that you will get may not be adequate for you to complete your school program. Besides, federal student loans are subject to availability. At times, the available amount that can be granted as loans may have been exhausted. For these reasons, undergraduates and professionals may not have option other than to apply for private student loans. However, it doesn’t matter how pressed you may be, it is not advisable to rush into private student loans so that you don’t get your fingers burnt at the end of the day.
If you are considering private student loans as an option, it is important that you ask relevant questions before you sign on the dotted line. The questions you should endeavour to ask should cover the following areas among others:
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- Interest rates: Never take any loan without asking about the interest rate that will apply. It does not matter the interest rate that the lender advertises about the loan. You should understand the interest rate may not necessarily apply to your situation. The interest rate that will apply to you will be based on your credit worthiness and risk profile. If the interest rate is too high, you may need to try other lenders. In most cases, the interest rates offered by Credit Unions are generally lower than what the traditional lenders offer. Some schools also have their own Credit Union. Therefore, you can take advantage of this. After you have found out information about the interest rate, you still need to ascertain whether the interest rate is fixed or variable. If it is fixed, it means that the interest rate on such private student loans will not change throughout its duration. But if the interest rate is variable, reverse is the case. The interest rate is subject to change. In most cases, variable interest rate will be very low at the initial stage of the loan. But later, the interest rate can increase far beyond the fixed interest rate. If you decide to agree to the variable rate, it will be safer for you to ask about the interest rate cap if any. This will protect you from being charged interest rates that may be too high for you to bear. If you ask people who are owing substantial amount as private student loans, they will let you know that they did not borrow that much. It is the accumulation of interest that makes many people find it difficult to pay off their student loans, thereby making them to remain in debts perpetually.
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- Total Loan Costs: The costs attached to private student loans go beyond just interest expense. There are other additional fees that you will be charged. For instance, if you are taking private student loans, you will be charged origination fee. Origination fee is usually a certain percentage of the total loan. Therefore, it is important that you find out what the rate will be. By the time you add all these costs together, they can add up to become very significant. So, if you need to borrow say like $20,000 private student loans, you should have it at the back of your mind that the additional costs may be around 5% of the loans.
- Borrowing Limit: Not all private lenders will allow you to borrow as much as you want. When you shop around for private student loans, you may be faced with different challenges. While some lenders may offer favourable terms, they may place a borrowing limit on you thereby preventing you to raise enough money that will be sufficient for you. Borrowing limit may be to students’ advantage in some cases as it will force them to borrow responsibly. Even, if the lender is not placing any borrowing limit on you, you should know where to draw the line. Don’t over borrow. You should only borrow what you need. Borrowing is one thing; paying back is a different ball game.
- Grace period: Grace period is the period between when you borrow your private student loans and the time you are required to start the repayment. You should ensure that the grace period is enough for you to be able to gather yourself before you need to start making payment on the student loan
- Deferment or Forbearance Option: Deferment or forbearance can be during or after school. Immediately your grace period is over, you will need to start your monthly repayment. It is not unusual that something can happen along the line that may prevent you from meeting your monthly repayment. It may be that you decide to go back to school or you suddenly lose your job. That is why you need to ask if there is possibility of deferment which will allow you to temporarily suspend or reduce your repayment amount. Some private student loans lenders provide in-school deferment option. Nevertheless, interest will still accrue on the loan during the deferment period. You have the option of paying the interest immediately as it accrues or you allow the interest to be capitalized once the loan enters repayment. You can still ask if the lender offers any hardship waiver. This is not common with private student loans. Private lenders will hardly discharge student loan debt upon death or disability of the original borrower or co-signer. So, if you are a parent and you want to cosign private student loans, you should be aware that you may be the one to pay off the loans if the borrower dies or becomes incapacitated.
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- Ease of Consolidation: You should be able to consolidate your student loans if necessary. But if the consolidation is practically impossible as a result of some stringent terms and conditions attached to the loan, you may need to reconsider such private student loans.
- Pre-payment penalty: Many private student loans lenders don’t want their victims to get off the hook. They want the borrowers to stick to the initial agreed repayment plan so that they can keep earning interest throughout the loan duration. One way you can quickly pay off your student loans off is by making large lump payment either by applying your bonus or tax refund to pay down the loan. You can even get some inheritance that you will like to apply towards the repayment of your college debts. Some private student loans lenders will not totally stop pre-payment but the kind of pre-payment penalty you will be asked to pay will discourage you. Any loan that does not allow pre-payment may not be good enough.
Having gone this far, I believe that you now know what to ask if you are considering taking private student loans. It is always better to look before you leap.