Student Loan Programs

Use a Private Student Loan to Supplement Your Federal Student Loan

September 4th, 2007 Subscribe To Our Feed

You may be wondering what the difference is between a private student loan and a federal student loan. Well, the difference is significant! Let’s start with the Federal student loan. This type of loan is guaranteed by the Federal Government and often provides many attractive terms, such as, a low interest rate, a deferred repayment plan, subsidized interest payments and longer repayment terms.

Where to Apply for a Private Student Loan

Alternatively, a private student loan is more like a personal loan for a college student to use as they see fit. These private student loans are obtained through commercial banks, credit unions and other types of financial institutions. They are generally based not on financial need (like a subsidized Federal student loan), but on creditworthiness and ability to repay.

The Best Use of Private Student Loans

Private student loans can best be used to supplement federal loan programs. These types of loans can be used for many different educational purposes, such as tuition, books, living expenses as well as computers. The interest rates, as well as, payment terms typically differ between lenders and are based on the creditworthiness of the borrower.

If your credit record isn’t all it should be, it may be possible for a co-signer to help you qualify for the private loan. The student should meet the most basic requirements, a mostly satisfactory credit history, a record of employment, and proof of US citizenship. In case the student does not meet the minimum eligibility requirements, they can apply for a private student loan with a co-applicant who does meet those requirements.

The Cost of a Private Student Loan

The costs associated with a private student loan are generally tied to the interest rates being charged. They can differ according to the particular purpose of the loan. A typical interest charge for a private loan for an undergraduate would be LIBOR plus 4.65 percentage points. The LIBOR rate is a set index of interest rates used for determining loan interest rates.

The Popularity of Private Loans for Education

With a steady rise in college costs and the increase in federal student loans, there is little wonder that private student loans are becoming the fastest growing source of funds for U.S. college education. Many students and their families are finding that private student loans are a convenient and simple way of securing the money required to cover college education costs.

The Private Student Loan Application Process

The application process for a private student loan has become very streamlined, with the entire process being completed in as little as fifteen minutes. An alternative or private student loan generally gets its funding from private financial institutions and are therefore not subject to federal guidelines. These loans provide a great deal of flexibility because they can be used to cover not only tuition costs, but for many other education-related expenses (housing, textbooks, materials, etc.).

Remember: one of the best uses of a private student loan is to supplement one of the federal student loans, especially when the federal student loan does not cover the full cost of education.