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During the course of your college career, you may find that the financial aid for which you qualify doesn't quite cover all of your college costs. After you've exhausted all of your other options — including federal, state, and institutional grant and loan programs and other sources of funding — you might consider a private loan.
To help you make an informed decision about taking out a private loan, Congress passed legislation that requires you to complete and file a Private Education Loan Applicant Self-Certification Form with your lender before you receive a private loan. The purpose of this form is to inform you that:
You are strongly encouraged to discuss all financing options with your school's financial aid office.
Private loans differ from federal loans in a variety of ways. First, the Department of Education makes federal student loans; you'll have to find a lender who makes private loans. Your school may be able to provide you with the names of some lenders who make private loans to their students. The lender generally will perform a credit check to determine whether to approve the loan. If you have adverse credit, or lack sufficient credit history, your application may be denied or you may be asked to provide a co-signer (also known as an endorser) with a good credit history. Many federal loans do not have a credit requirement.
There are other important differences that include loan fees and interest rates, which generally are higher for private loans. Also, repayment terms usually are not as flexible as they are for federal loans. And, deferment options are more limited, and few, if any, lenders offer options to discharge (forgive) a private loan under certain circumstances.
The following table lists some differences between private and federal loans. To weigh your options, review the "Questions to ask" column for each factor.
|Factors to consider||Private loans||Federal loans||Questions to ask|
|Interest rates||Variable interest rates are tied to key interest rates, such as LIBOR or PRIME, plus a margin. The interest rate offered by the lender may also depend on your credit rating or the rating of your co-signer, as well as other non-financial factors.||Federally-set, fixed interest rate by loan type.||Which loan offers the best interest rate? How often does the interest rate vary? What rate will you qualify for based on your credit rating?|
|Loan fees and late charges||Lenders may set loan fees and late charges based on your credit rating or the rating of your co-signer.||Federally-set loan fees by loan type. Federally-set late charges.||What are the repercussions to your loan balance, interest rate, and credit rating if you're late on a loan payment?|
|Repayment options||Loan discharge, loan forgiveness, and forbearance are generally not available; and deferment options are limited.||Certain eligible borrowers may elect to defer repayment or request a forbearance. Loan discharge and forgiveness are available under certain circumstances.||If you return to school, experience economic hardship, become totally and permanently disabled, or die, what are your responsibilities toward your loan? Can your obligation be deferred or discharged?|
|Cosigners/Endorsers||Lenders generally require a credit check and may have other lending criteria such as a minimum loan amount, the use of a creditworthy co-signer or an income requirement.||A co-signer is not required for a Federal Stafford Loan. However, one may be required for a Federal PLUS Loan, either for a parent of a dependent undergraduate student, or a graduate or professional student borrower.||Do you have a good credit rating? What other lending criteria does the lender have? If you need a co-signer, do you have someone who is willing to co-sign with you? Is your co-signer creditworthy?|
You should begin researching the various private loans available. Make sure when you consider the loan terms, you compare apples-to-apples so that you can make the most informed decision possible.
For each private loan that you research, find out the following information:
Before borrowing a private loan, carefully consider your debt and repayment obligations on all loans. Determine how much you need to borrow by working out a budget for your educational costs and subtracting all of your available resources for those costs.
Remember: Borrow only what you need. Private loans must be repaid in addition to any federal loans you may borrow. You should not — and may not be permitted to — borrow a private loan for more than your cost of attendance for the period of enrollment (usually the school year) minus any other federal, state, and institutional aid you have or will be awarded for that period.
If you've decided to apply for a private loan, here are the general steps to follow to begin the application process.