Private Student Loans

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Private student loans are becoming more popular each year due to the fact that federal grants have not kept pace with rising tuition and living expenses. Private loans, along with federal programs such as Stafford Loans or Perkins Loans, are a very important way for students to fund their education today.

Federal versus Private Student Loan Debt

In fact, around 65% of college students graduate each year with federal loan debt that averages nearly $20,000 per student. The reason the federal government began offering loans to students were to offer them better terms and conditions than the private sector could afford.

Additional Resources

The hope was that these programs would make it easier for students to repay these college loans as they entered the workforce. This was true for many years, but the rapid rise of tuition has made achieving that objective more difficult. Today, we have a private student loan is a necessity for many.

Reasons Students Seek Private Loans

Unfortunately, Direct Loans and the Family Federal Educational Loan programs simply may not be meeting the financial needs of students today or there could even be problems with awareness of these programs. The point we're trying to make is this - the recent rise in private loan borrowing is probably attributed to one of several problems:

Students are simply unaware of the federal loan programs.
College students are not taking full advantage of the federal loans available to them.
The aid available is inadequate in meeting the student's need.
Private student loans are being used to fund the cost of the expected family contribution.
Students are seeking aid beyond the need they demonstrate.

Unmet Financial Need

Interestingly, studies have shown that the majority of students that have private loans did not have unmet financial need. Unmet financial need is the difference between the cost of attendance and all of the funds available to the student - grants, work study, federal loans, and the expected family contribution.

Since these students did not have unmet need, it is very likely that they sought out private loans either to fund the expected family contribution itself, or the true cost of attendance was in excess of that used in the government's calculation.

Student Loan Interest Rates

As you would with a personal loan, you need to think through and work through all your options when it comes to taking out a private student loan. The underwriting decision on any loan is based on several factors including the perceived or real risk that the student borrower may default on their loan.

The reason this is important is because the risk of non-payment is going to drive up or down the interest rate paid on a student loan. Adding to this is the fact that for many students creditors do not sufficient information to get an accurate picture of their credit risk. Students basically have not paid enough bills for credit agencies to get an accurate picture of their credit scores from their credit history / report.

Student Lenders

That being said, there is certainly a robust market when it comes to financial institutions that are willing to lend students money. Citibank, Bank One, Wells Fargo, Wachovia, and Bank of America are some of the larger banking lenders that specialize in this area. All of these private lenders run accredited programs aim at meeting the financial needs of students.

Shopping for a Private Student Loan

Before making any kind of commitment on a private loan, a student or parent borrower needs to consider several factors while "shopping" for a loan. The following list can be helpful when comparing loans from several lenders:

Loan Fees - lenders typically charge origination and /or processing fees that are sometimes added to the total outstanding balance on a loan.
Interest Rates - are the interest rates fixed throughout the life of the loan or does the interest rate change after graduation?
Monthly Payments - does the lender offer flexibility with respect to the student's monthly payments? For example, can the student make interest only payments while they are still enrolled in school or can they even offer a no payment until after graduation option?

If you're a student and you're not sure of the exact terms and conditions on a private loan you're considering these should be spelled out in the Truth in Lending statement that your private lender provided you first applied for a loan or when it was originated.

Alternatives to Private Student Loan

Unfortunately, nearly 25% of students seeking private loans did not take full advantage of Stafford Loans available to them. Another 26% of these students borrowed less than the maximum available to them. Before seeking private loans, students should be aware of the full breadth of Stafford Loans.

For over 30 years, Sallie Mae has also been helping students find and manage their student loans. Sallie Mae has its own private loan program, which is privately insured and credit based. Both undergraduate and graduate students are eligible for this private loan program. Sallie Mae can also help students find private education loans though lending partners.

The bottom line is that there are private loans that are available to student, but the borrower should be careful to take full advantage of the resources available through the federal government first.

Private Student Loan Consolidation

If you have a private loan that was made by a state or private lender - and not guaranteed by the federal government - then that student loan is not eligible for consolidation through the Department of Education's student loan consolidation program .

The good news is that Sallie Mae does offer private student loan consolidation if:

You have a private student loan from a bank or credit union.
You have at least $5,000 in student loans.
You've got a good credit rating or a cosigner with a good credit rating.
You've already graduated or you will be graduating from a postsecondary program.

In fact, Sallie Mae offers a wide array of student loan consolidation options.

Student Loan Calculators

Whether you're thinking about saving for college, private loans or loan consolidation we've got a complete line of loan calculators that can help:

College Funds - our college funds calculator let's you figure out how much you need to save each year to make your college funding targets and goals.
Loan Consolidation - our consolidation loan calculator allows you to see what your monthly payments will look like before and after consolidating a loan.
Loan Calculators - finally, we've got a complete line of loan calculators that can help you run through every possible scenario you can think of.

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