Student Loans through Banks
A Reasonable Strategy for Financing Private Student Loans
Private student loans, interchangeably called alternative student loans, should be used to complement your college financing strategy.
Exhaust your federal student loan options first, before you even consider the chances that you may need private loans to augment your education. An unfortunate trend in student debt is the rapid increase in high cost private loans:
Statistic: In academic year 2004-2005 students borrowed 30% more in private student loan funds than they had just the previous year. 1
Remember this rule: squeeze every nickel you can from your Federal student loans first.
You’ve exhausted your federal student loan options and received any scholarship and grant monies. Now you may cautiously consider how a private student loan could be used to optimize your student financial package.
A practical strategy for calculating your remaining college financial needs:
- Experiment with the variety of college cost calculators available to you on almost every lender’s website. Budget calculators, tuition calculators, and student loan calculators may all be used as complementary tools that assist you in distilling a final financial bottom line.
- Add together your savings, federal student loan awards, scholarship and grant money. Subtract this figure from the school’s total cost of attendance (this is tuition plus room and board and other education-related expenses). The result is a close estimate of what you may consider financing through private loans.
Choosing a Private Loan Lender
Given the fact that almost every private bank and student loan lender offers its own brand of private student loan, there is no good reason to be hasty when choosing a lender or product. You’ll quickly discover a wide array of private loan options, products designed for particular types of students, different interest rates, loan limits, borrower fees, and repayment terms. Consider all of these components before you choose a lender.
- Examples of private banks that lend private loans include Bank of America and Citibank.
- Examples of student loan lenders that include private loans as key components in their suite of products: Sallie Mae and Nellie Mae.
The convenience and accessibility of private loans is as much their downfall as their benefit.
How Private Loans Work
Private student loans are a remarkable departure from the federal suite of loan products. Federal loans are low-interest, very affordable financial tools specifically designed to give American students the easiest access to higher education. Private loans, on the other hand, have been criticized for their variable interest rates, that can turn as ludicrous as the worst credit card rates, and their shockingly high loan limits.
- These are credit-based loans. If you have poor credit or no credit chances are likely you will have to find a co-signor in order to borrow.
- Variable interest rates could put you at the mercy of a fickle industry.
- Feature no grace periods: you are required to begin loan repayment as soon as funds are disbursed.
- May be packaged with hidden borrower fees.
- Often require a minimum loan amount.
Borrow only what you absolutely need to meet that final college cost bottom line , which you calculated previously.
If you need money to cover extra expenses such as textbooks and course materials, housing costs, and transportation, you might figure this into your supplemental student loan strategy that includes the private loans.
Read the Terms of College Loans for the Best Rate
Make sure you know all the terms for borrowing on a private student loan prior to accepting thousands of dollars from your bank. Understand the plan of repayment, the way interest accrues, and any fees associated with the loan.
When used correctly, private or alternative student loans can provide a practical and reasonable financial bridge between what you have combined in federal funds and personal savings and what you have calculated to be the final cost of your college education.
1 “Quick Facts About Student Debt,” Project on Student Debt, September 4, 2007, accessed October 15, 2007, http://projectonstudentdebt.org/pub_view.php?idx=125 .
