Private Student Loans for your Education

Why Take out a Private Loan

There are various reasons why students take out private loans to complete their education. They may feel that the federal student loan plan is not adequate to cover their total expenses, have already used all their federal aid options, don’t wish to jump through the loops for a federal aid application or honestly believe the lender is offering them a good deal. Private loans are usually applied through a bank or lending institution and offered with variable rates. If the student already has a credit line through the institution, this may seem an easy fix to continue their advanced education requirements. However, private lenders rarely offer a loan with a lower interest rate than the type received through a federal student loan. Interest rates can be as high as 18% of the cost of the total loan, substantially increasing the amount you will have to pay back.

The Hidden Costs of Private Student Loans

Private student loans are not subsidized. With a federal loan, financial need students may qualify for a subsidized loan in which the government pays back the interest required on the loan. The interest rate on a private loan is not tax deductible. You will have to pay the full interest rate back, regardless of you financial situation. Private student loans cannot be consolidated into a Direct Consolidation Loan, one of the options of a federal student loan program, nor is it likely your private loan will have a loan deferment program. Generally, you must begin paying back your private loan while you are still in school.

The Pitfalls for a Co-Signer

Banks and financial institutions offer require that you already have a credit line established, or if you don’t, require a co-signer for the loan. Typically, the borrower receives a lower interest rate if there is a good credit history. If you do not repay your loan, it’s up to the co-signer to carry the burden of financial responsibility. Your co-signers put their credit history at risk, if you fall behind on payments or make late payments on your private loan. Usually, the co-signer cannot be discharged from a student loan debt by declaring bankruptcy on the loan.

As a student preparing for a career, one of your goals is to show you are a responsible person, ready to meet all financial obligations. Before taking out a private loan, examine your abilities for paying it back carefully. It may mean that you will have to take a part-time job while still involved in your course of studies, or take the first job available to you on completion of your education. Failure to pay back under the terms of the loan can cost you thousands of dollars in the long run, ruin your credit history and damage the economic security of your co-signer.