Private
student loan rates are lower than non-specialized private loans
(e.g., "signature" loans) but slightly higher than government
loan rates.
That may be changing, as pending legislation would raise government student loan rates to similar rates as private student loans. Consumers should be aware that some private loans require substantial up-front origination fees. These fees raise the real cost to the borrower and reduce the amount of money available for educational purposes.
Most private loan programs are tied to one or more financial indexes, such as the Wall Street Journal Prime rate or the BBA LIBOR rate, plus an overhead charge.
Because private loans are based on the credit history of the applicant, the overhead charge will vary. Students and families with excellent credit will generally receive lower rates and smaller loan origination fees than those with less than perfect credit. Money paid toward interest is now tax deductible.
Private student loan fees
Private loans often carry an origination fee. Origination fees are a
one-time charge based on the amount of the loan. They can be taken
out of the total loan amount or added on top of the total loan
amount, often at the borrower's preference. Some lenders offer
low-interest, 0-fee loans, but these are usually available only to
those with high credit scores (800 or more). Each percentage point
on the front-end fee gets paid once, while each percentage point on
the interest rate is calculated and paid throughout the life of the
loan. Some have suggested that this makes the interest rate more
critical than the origination fee.
In fact, there is any easy solution to the fee-vs.-rate question:
All lenders are legally required to provide you a statement of the
"APR (Annual Percentage Rate)" for the loan before you sign a
promissory note and commit to it. Unlike the "base" rate, this rate
includes any fees charged and can be thought of as the "effective"
interest rate including actual interest, fees, etc. When comparing
loans, it may be easier to compare APR rather than "rate" to ensure
an apples-to-apples comparison. APR is the best yardstick to compare
loans that have the same repayment term; however, if the repayment
terms are different, APR becomes a less-perfect comparison tool.
With different term loans, consumers often look to 'total financing
costs' to understand their financing options.
Eligible loan programs generally issue loans based on the credit
history of the applicant and any applicable cosigner/co-endorser/coborrower.
This is in contrast to federal loan programs that deal primarily
with need-based criteria, as defined by the EFC and the FAFSA. For
many students, this is a great advantage to private loan programs,
as their families may have too much income or too many assets to
qualify for federal aid but insufficient assets and income to pay
for school without assistance.
Additionally, many international
students in the United States can obtain private loans (they
are ineligible for federal loans in many cases) with a cosigner who
is a United States citizen or permanent resident. However, some
graduate programs (notably top MBA programs) have a tie-up with
private loan providers and in those cases no co-signor is needed
even for international students.
The terms for alternative loans vary from lender to lender. A common
suggestion is to shop around on ALL terms, not just respond to
"rates as low as..." tactics that are sometimes little more than
bait-and-switch. Examples of other borrower terms and benefits that
vary by lender are deferments (amount of time after leaving school
before payments start) and forebearences (a period when payments are
temporarily stopped due to financial or other hardship). These
policies are solely based on the contract between lender and
borrower and not set by Department of Education policies.
Federally subsidized consolidations are not available for
alternative student loans, though several lenders offer private
consolidation programs. Borrowers of privately subsidized student
loans may face the same restrictions to bankruptcy discharge as for
government based loans: New legislation makes clear that these loans
are, like federal student loans, not dischargeable under bankruptcy.
Even before the legislation was passed, however, private student
loans that were guaranteed 'in whole or in part' by a nonprofit
entity are non-dischargeable in bankruptcy (and most private loans,
regardless of the lender, were indeed guaranteed by a nonprofit).