Last week, we talked about whether or not student loan debt is a wise investment. Outliers aside (Gates, Zuckerberg, etc), it proves to be a direct correlation with your income. We here at CNA Finance adore high incomes so you better get an education. In this week’s post, we’re exploring the murky waters of private student loans. What are they? What kind of interest do they offer? Should I get them? Why? All your questions will soon be answered.
There are two basic types of student loans: federal student loans and private student loans. When you’re going to college, federal loans abound. It’s easy to get them so you’ll have no problem gaining that information. But what about private student loans? Where’s the information about those?
Private Student Loans Explained
Private student loans come from private financial institutions (mostly banks). These loans can either supplement or replace the need for federal loans (such as Stafford, Perkins, and PLUS loans – I should know as I’ve had all three). Private student loans work about like a car payment, mortgage, any other way to borrow money. Unlike federal student loans, private loans require you to begin paying as soon as you take out the loan. They seldom offer a forbearance or deferment period. Interest may not be tax deductible. They are unlikely to qualify for loan forgiveness programs. A good credit score is more important when getting private loans. Private student loans sometimes come with variable interest rates. They also can offer higher borrowing limits than federal loans.
Really, private student loans are quite different from federal. And although on the surface they seem expensive and scary, that may not be the case in your situation. You may actually be able to save money by choosing to go private.
What kind of interest rate can I get with a private student loan?
The rate you get is directly related to your credit score as well as your cosigners (if applicable). I recommend you use a tool like SimpleTuition to run the numbers for yourself. You can input your data and get accurate numbers for your situation. It’s quite easy to find an interest rate lower than you can get going federal.
I quickly found loans I qualify for at around at 2%. That’s wayyyy better than the Federal Parent PLUS loan at dang near 7.5%.
Should you get a private student loan?
Maybe. The original question we sought to answer with this post was, “Are student loans okay?” My answer is a definite ‘yes’. I’ve done the research and all signs point towards researching private student loans right alongside federal loans. I wish I had done that. I could probably have saved hundreds, if not thousands, in interest.
To look into student loans of any kind, start by filling out the FAFSA. It’s boring but it’s not a traumatic experience. Next, look over all your options. Use SimpleTuition as I mentioned earlier. If you still have some time, focus on raising your credit score in case you want a private loan. Read this study showing the difference between interest with good credit and interest with only ‘okay’ credit. Just doing things like paying your credit card off each month will raise your score surprisingly quickly. Checking out loans is just like checking out colleges. You want the best experience for the lowest cost.
Word of Caution:
Don’t listen only to the people in your university’s financial aid office. They will pitch you federal loans left and right. They’ll make it easy to sign them. They’ll probably act like it’s no big deal. However, don’t be that carefree. We’re talking about college here. We’re talking about bettering your lifestyle and future income. You need to be serious. Banks and credit unions make borrowing a more serious process. It’s a MASSIVE perk of going private with your debt.
Shop around. Besides buying a house, your education may be your biggest expense. Seriously. I spent nearly $20,000 on loans and that’s less than average. Average is about $30,000 but that’s only taking into account public education, since that’s the only public information. If you count private educations (as mine was), I wouldn’t be surprised if that number doubled.
Good luck shopping around. There’s nothing inherently evil about private loans. It just seems scary at first because private lenders ask more questions and treat you more like an adult. Which I believe is a good thing.