Private Student Loans

Private student loans are becoming more popular each year because federal grants have not kept pace with the rising cost of tuition, room and board.  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, which averages nearly $20,000 per student.  The reason the federal government offered loans to students was to provide them with terms and conditions the private sector could afford.

The hope was that these programs would make it easier for students to repay their 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, a student loan from a private institution is a necessity for many.

Reasons Students Seek Private Loans

Unfortunately, Direct Loans and the Family Federal Educational Loan program may not be meeting the financial needs of students today, or there is a lack of awareness of these programs.  The point here is this:  The recent rise in private loan borrowing can be 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 needs.
• 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.  This includes grants, work study, federal loans, and the expected family contribution.

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

Student Loan Interest Rates

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

This is important because the risk of non-payment is going to drive up, or down, the interest rate charged on a student loan.  Adding to this problem is the fact creditors do not have sufficient information to get an accurate picture of many students' credit risk.  Students have not paid enough bills for credit agencies to get an accurate picture of their credit ratings 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, and Bank of America are some of the larger banking lenders that specialize in this area.  All of these private lenders run accredited programs aimed 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 do they 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.  Your private lender provided you with a copy of this statement when you first applied for a loan, or when it was originated.

Alternatives to Private Student Loans

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 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 through lending partners.

There are private loans available to students, but the borrower should be careful to first take full advantage of the resources available through the federal government.

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 have a good credit rating, or have access to a cosigner with a good credit rating.
• You graduated from a college / university, 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 have a complete line of loan calculators that can help:

• College Funds - our college funds calculator lets 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 have a complete line of loan calculators that can help you run through every possible scenario imaginable.

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