Sunday, 4 January 2009


Posted by yan manik

Turning to a private education loan for help with climbing college costs can be awfully tempting.
With an online application and the promise of a low interest rate, a private loan looks so easy and so affordable. But there's plenty to be wary about. Private education loans, also called lternative loans, exist outside of the federal student loan program.

With a federal loan, every borrower is guaranteed a fixed, low interest rate and receives the maximum borrower benefits. That's just not the case with a private loan. Private loans are variable-rate commercial loans that require credit checks. So you'll need a good credit history or a co-signer to land the low rate you saw online.

If you have less-than-stellar credit, you could end up paying a much higher rate, as much as 18 percent. And there's nothing affordable about that. And because rates on private loans are variable and fluctuate according to market conditions, whatever interest rate you qualify for could change.

The repayment terms on a private education loan vary by lender. With some lenders, repayment begins immediately. Other lenders may allow borrowers to defer loan payments while attending classes.

You also have fewer borrower protections with private loans than you do with more affordable, fixed-rate federal loans such as the Stafford loan.
Federal loans come with a range of borrower protections that are mandated in the federal Higher Education Act.
For example, with a federal Stafford loan, every borrower is entitled to deferment due to economic hardship or unemployment for up to three years, as long as the borrower meets eligibility requirements for these deferments. Lenders of Stafford loans may also offer forbearance, a temporary postponement of payments, for up to 12 months at a time.
Private education loan lenders are not required to offer forbearance or deferment options. Some lenders charge fees to process forbearance and deferment requests of up to $50, and forbearance may only be available for six months.

A private loan is an option to consider after you've exhausted your more affordable federal lending options. So when borrowing to pay for your college education, put federal loans first and private loans a far, far second. To land a good deal on a private education loan, you'll need to shop carefully. Rates and fees vary widely. Here are some important questions to ask when shopping for a private loan:

What are the credit qualifications? All private education loans require a credit check. Private lenders may consider your credit record, assets, debts, income, as well as your college or university and your field of study.
If you have limited or flawed credit, like the majority of students, you may be approved for a loan at a higher interest rate or require a co-signer to qualify for a loan.

next to part.2


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