You've received your financial aid package and still can't afford the college of your choice. What should you do? Applying for a private student loan could be one solution to getting the additional funds you need to earn a college degree.
Alternative Student Loans
More people are applying for private student loans to cover the rising cost of earning a college degree. In fact, private student loan volume is growing 25% a year, compared with 8% a year for federal student loan volume, according to FinAid.org. However, students should only consider applying for alternative student loans after they've received the maximum amount of federal, state, and private grants, scholarships, and loans.
Private vs. Federal Loans
Private student loans generally have a higher interest rate than federal loans. Different lenders also have different fees, which can be costly. When you compare private student loans, it's important to remember that 3% to 4% in fees is about the same as a 1% increase in the interest rate, according to FinAid.org.
Credit Scores Matter
When you apply for a private student loan, your credit score determines the interest rate you get. Generally, interest rates are tied to the prime rate or LIBOR index. If you don't have the best credit score, you may need a co-signer to qualify for a better rate. Although a lender may advertise one interest rate, you could end up with a completely different deal because they only offer the advertised rate to their best customers. For instance, people with bad credit may end up paying interest that is as much as 6% higher and fees that are as much as 9% higher than customers who have good credit, according to FinAid.org. Don't let yourself slip into credit-card debt. Try to pay off your balance each month, and avoid credit cards with a high interest rate. Do your research to find the best credit cards.
You can use private student loans to pay for what you or your family is expected to contribute to your education costs. However, if the loan amount is more than the difference between the cost of attending your school and your financial aid, it could reduce the amount of need-based aid you receive.
Consolidating Student Loans
Although private student loans can't be consolidated with federal loans, they can be refinanced on their own. Consolidating loans can help reduce your monthly payment and interest rate, especially if your credit score has greatly improved since you took out your private loans. Talk with your lender to see if you can get your interest rate lowered before applying for a consolidation loan. If you do consolidate, ask if the new loan will have any penalties for prepayments.
Both students and parents can apply for private loans, and many parents cosign for their children. Interest paid on a private student loan may be tax deductible, so speak with your financial advisor about your particular situation.