A great majority of student loans come from private sources. If you hear about a student having to pay off student loan payments after he or she graduates, the loan is likely from a private source. The federal government has reliable loan programs in place for students in need, but these loans often fall short of all college expenses. As a result, students look to private student loans to fill the gap.
The Pell Grant is a need-based federal loan that does not have to be repaid. The largest amount awarded is around $4000. This is enough for some community college tuitions, but not nearly enough for some state or private universities. A few decades ago the most expensive college tuition was $20,000 a year. Now you’ll see tuitions in this range all across the country. $20,000 might not even account for room and board, books and supplies, and other costs, such as entertainment or transportation. For many students, private student loans are the only way to pay such steep fees.
Types of Student Loans
There is a varying list of private student loan opportunities. Because students are considered a higher risk, some student loans can have a fairly high interest rate. Because students are young and have not yet established a credit rating, the interest rate is a form of protection for the lender to protect against defaulted payments. However, not all private student loans have unattractive terms.
Indeed, lenders try to bring in student borrowers with some very attractive terms: no application fee, deferred interest until after graduation, low rates, high borrowing limits, and loan consolidation. The latter is important if the student is getting loans from several different sources. Instead of paying several different interest rates, student loan consolidation will lump the loans together in one flat rate.
It is important to find a reputable loan provider that has experience in the field. You want the lender to be able to make good on the loan. In addition, you don’t want a disreputable reputable lender who may have a lot of unscrupulous fine print. For example, a disreputable private lender may raise the interest rate to an astronomical level for one missed payment. This is just a warning – there are several private lenders who will make good on payments with fair terms.
Student loans are often unsecured – they do not need collateral – though these can have a high interest rate than secured student loans. If possible, the student should have a co-signer for the loan because this can bring interest rates down considerably.