Private Student Loans
Federal grants have not kept pace with the rising cost of college. Private student loans, along with federal programs such as Stafford and Perkins Loans, have helped to fill that void; playing an important role in funding a student's education.
Federal versus Private Student Loan Debt
Around 65% of college students graduate each year with federal loans averaging nearly $35,000 per student in 2019. The original objective of federal programs was to offer students favorable terms, enabling them to both qualify for a loan as well as provide reasonable repayment plans.
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.
Private Loan Growth
The recent rise in the popularity of private loans can be attributed to several problems:
- Students are simply unaware of the programs such as Direct Loans.
- 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 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
Studies have shown the majority of students that have private loans did not have unmet financial need, which 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 likely they applied for private loans to fund their expected family contribution, or the true cost of attendance was in excess of the values used in the government's calculation.
The underwriting decision on a private loan is based on several factors, including the perceived or real risk the student borrower may default on their loan. The risk of non-payment is going to drive up, or down, the interest rate charged on a loan. Creditors typically do not have sufficient information to get an accurate picture of a student's credit risk. For example, they have not paid enough bills for credit bureaus to get an accurate picture of their credit ratings from their credit history / report. This is known as a "thin file" report.
There is a robust market when it comes to financial institutions willing to lend students money. Citibank, JPMorgan Chase, Wells Fargo, and Bank of America are some of the larger companies that specialize in this area. All of these lenders run accredited programs aimed at meeting the financial needs of students.
Before making any commitment, a student or parent borrower needs to consider several factors when researching loans. The following list can be helpful when comparison shopping:
- Fees: lenders typically charge origination and / or processing fees that are sometimes added to the total outstanding balance of 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 repayment flexibility? For example, can the student make interest-only payments while they are still enrolled in school, or do they offer a "no payments until after graduation" option?
The exact terms and conditions on a loan will be spelled out in the Truth in Lending statement. Lenders should provide copies of this statement when applying for a loan, or during origination.
Alternatives to Private Student LoansResearch indicates nearly 25% of students applying for private loans did not take full advantage of Stafford Loans available to them. Another 26% of these students borrowed less than the maximum amount.
For over 30 years, Sallie Mae has also been helping students find and manage their loans. Sallie Mae has its own lending program, which is privately insured and credit based. Both undergraduate and graduate students are eligible for this program. Sallie Mae can also help students find loans through lending partners.
Loans obtained from a state or private lender, and not guaranteed by the federal government, are not eligible for consolidation through the Department of Education's student loan consolidation program.
The good news is that Sallie Mae does offer loan consolidation services if:
- A student loan was obtained from a bank or credit union.
- There is at least $5,000 in student loans.
- The student has a good credit rating, or has access to a cosigner with a good rating.
- The student has already graduated from a college / university, or will be graduating from a postsecondary program.
Parents and students should have a wide array of options from which to choose. To help in that process, this website offers a number of online calculators, including:
- College Funds: helps the user figure out how much they need to save each year to make their funding targets and goals.
- Loan Consolidation: allows the end user to see what their monthly payments will look like before, and after, consolidating a loan.
- Loan Calculators: finally, this website offers a complete line of loan calculators that can help users run through many different scenarios.
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