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Private Student Loans: What You Need to Know

If you’ve used all your Stafford federal student loan and financial aid options, you might consider taking out a private student loan to help close the gap for education costs.

Who should use them:

While the Federal Stafford Loan and the Federal PLUS Loans may have lower rates, flexible repayment terms, and are highly accessible to students, sometimes they just don’t provide enough money to complete your degree(s).

Both undergraduate and graduate students who have already maxed out their federal aid can consider private student loans for education costs. Private loans can be a little harder to qualify for than federal student loans, and rates may range from 5.75% to more than 11% depending on your profile.

Using a cosigner may help provide a lower APR or help a student borrower get approved.

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When to use them:

File a FAFSA (Free Application for Federal Student Aid) if you haven’t yet, to see whether you qualify for any grants, work-study programs, or other financial aid. Check with the financial aid office at your school for help with this.

If you’ve truly used up all the aid available to you, it’s time to check out your private student loan options. If you’ve got a solid credit history, have maxed out your federal aid, and still need tuition assistance (and possibly help with room and board, books, and other school-related expenses) you’ll want to begin looking for a private loan.

How to choose a private student loan:

Fees: A loan with no fees sounds great, but beware of higher rates: the fees might be simply rolled into the APR. Still, high-fee, low-rate loans aren’t always the best deal, either. It all depends on the terms of the loan. Here’s a good rule to remember: if the lender charges 3-4% in fees, it equals about a 1% higher interest rate over the life of the loan.

Interest rates: A good rate on a private student loan should be competitive with a Federal PLUS Loan, which is currently 6.31% (not including origination fees). To get the best rates, you’ll need a good track record of financial responsibility, and possibly a cosigner with excellent credit, as well.

Cosigners: If you don’t have enough of a credit history yet to have a good credit score, you may need a cosigner. This is someone who will be equally responsible for guaranteeing the loan — maybe a parent, or another older relative with strong credit. First, find out if you’ll need a cosigner; then find out what the requirements are for that person.

Now that you know the basics of private student loans, you’ve got the prerequisites needed to continue to the next course: finding the right loan for you.

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal or tax advice.
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