The World of Private Student Loans

With the cost of higher education on the rise across the United States, and Federal assistance rates not rising to match, the question of where to get money for college has become a very real concern for many students in the 18-23 age bracket, the bracket which is still required to claim Mom and Dad’s income on their financial aid applications.

One option for students in this age bracket, and others as well, is private loans. But there are some very important things to look for when seeking a private loan company. There are many companies offering private student loans but not all of them are going to provide you with the best service. Remember that you will be taking out a considerably large amount of money and will have to pay it back eventually so you want to be sure that you are getting the best service available.

Interest Rates
The first thing you should investigate is the interest rate on your loan. Start with the type of interest, just as you would if you were applying for a credit card. A fixed rate loan is more likely to stay the same throughout the duration of your loan, although not guaranteed. On occasion, due to an extreme rise in the prime rate, perhaps, even a fixed percentage rate may rise, but at a far smaller integral than a variable rate.

When you have determined whether the company you are investigating offers a fixed or variable interest rate, take a look at the rate itself. Most student loans will be offered in the range of 3-5% interest. A lower rate, however, doesn’t always mean a better deal. There will be more details about how this works as we progress; you have to be sure to compare each company to the other completely.

Payback Schedule
One factor that can make a loan with a lower interest rate an inferior value compared to one with a slightly higher interest rate is the payback schedule. Consider this. The American job market is increasingly competitive and nearly half of all college graduates have to search for several months before finding a job. You don’t want to be caught in the position of being required to pay back a loan immediately following that long walk to get your diploma if you are going to find yourself spending three months unemployed and searching for a job. Look for a loan which will allow you at least six months before you have to start making payments.

Also, when looking at the payback schedule, try to find out what the payments will be. With some it will be a small percentage of your salary (generally 1-2%), in others it will be a set rate, other still will offer you a percentage of the loan principle. Just as with the percentage rate, remember lower is not always better. Consider when investigating the loan payments that the smaller your payments, the longer it will take to finish the pay off.

Consolidation Services
Chances are that you will have more than one student loan throughout the course of your college career. When seeking the services of a private loan company, inquire about their policies for loan consolidation. Consolidation of your student loans after graduation does a few things for you; it permits you to make one payment for all of your loans instead of separate payments to each company. If you find that one company does not provide consolidation services you may want to look elsewhere for your loan needs.

Payment Options
Some companies will impart penalties for early payment, such as increasing the amount of your monthly payments. Others will offer incentives for paying off the entire loan at once, such as waiving incurred interest or even reducing the principle amount by a percentage (generally no more than 10%). Inquire about these in the application process, specifically to avoid early payoff penalties.

Reputation
When you have examined all the other areas of the potential loan companies, the final step is to check their reputations. Contact the Better Business Bureau (BBB) and inquire about each company. Take into consideration which of the companies you are auditioning are registered with the BBB, first, and then if any of them have had complaints filed against them. Also consider that anyone can file a complaint about a business and the nature of the complaint should be deliberated; separate the personal issues from the valid complaints that can and most likely will effect you. Complaints such as the payments were too expensive should be discarded while complaints about difficulties reaching customer service representatives when they are needed are more likely going to effect anyone who comes into contact with the company.

Addressing these five areas when seeking a company to provide you with a private student loan will help you to find the right company for you and to separate out the companies that may not provide you with the level of service that you are looking for. If you have attended to each of these issues and still have questions you can visit your school guidance counselor or financial aid office. They have tools and resources to help you choose the right private loan company to suit your needs.