Private loans – students hear about them but sometimes do not quite understand exactly what they are, what they are for, or what they entail. Basically, private loans for education can make up the difference between the amount a student receives from federal financial aid and the actual cost of his or her college education.
If a student's financial aid package does not quite meet their needs and he or she has gotten all the grants and scholarships he or she possibly can, private loans can be a saving grace.
Unlike with federal financial aid, a student's eligibility for private loans for education depends on his or her credit score – or the credit score of his or her parents. Private loans offer more flexible repayment options than some federal loans. In general, private loans are more expensive than federal loans, but they cost less than credit card debt. Federal loans also offer lower interest rates, so students are always encouraged to get as many federal loans as they can before looking into private loans for education.
Private loans do have their merits, however. As mentioned, they are sometimes the saving grace when a student has exhausted the federal amount he or she is allowed but still has need of financial aid. Parents are often better off with borrowing private loans as well, namely because they can defer payments until their child graduates (for instance, if their child has promised to pay off his or her own school debts, but needs help with getting a loan in the first place) – however, the interest does build up over this time. Looking at it one way, this is really no different than what can happen with unsubsidized federal loans.
The good news is that if a student – or his or her parents – has a decent credit score, it can significantly affect the interest rates for a particular private loan for education. In general, the better the credit score, the lower the interested rate. As such, it is better to apply for a private loan with a cosigner. After all, a student may have a bad – or nonexistent – credit score, while his or her parents have an excellent one. The parents can cosign, defer the payments until their child graduates, and not be responsible for the payments themselves. This is an excellent way to help a child keep their educational debt down, if only for a small amount.
Private loans for education are unquestionable helpful when federal aid simply does not grant enough money to a student. However, they should really be considered a last resort, as federal loans do offer better interest rates. Conversely, private loans often offer better, much more flexible repayment plans, so it all truly depends on an individual student's needs, means, and financial status. Parents should only consider cosigning a private loan for their child if they are first certain that, should anything happen to make the child unable to pay for the loan, they can afford to, and secondly, if they know they can trust their child to begin paying back the loan after he or she graduates.