Private Education Loans

By: EconomyWatch Content   Date: 27 November 2009

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Private education loans, also called alternative education loans, help bridge the gap between the actual cost of your education and the limited amount the government allows you to borrow in its programs. Most families opt for private education loans when:

  • The amount provided by federal loans is inadequate.

  • When they need more flexible repayment options. 

Types of Private Education Loans

Private education loans are of two types.

  • School-channel loans: These loans are “certified" by the school, meaning the school authorizes and signs on the application for the loan. The lender disburses the funds directly to the school. These loans usually take longer to process, but offer borrowers lower interest rates.

  • Direct-to-consumer private loans: In these loans, the school’s participation is not required. A student applying for the loan simply supplies his/her documents verifying his/her enrollment to the lender. After the processing of the application concludes, the loan is disbursed directly to the student. While direct-to-consumer loans usually carry higher interest rates than school-channel loans, they offer families rapid access to funds. Loan providers range from large education finance companies to specialty companies that focus exclusively on this niche segment. 

Interest Rates Applicable on Private Education Loans

 

Private education loans typically have variable interest rates, as against the federal student loans that have fixed rates. Most private loan programs are tied to one or more financial indexes, such as the Wall Street Journal Prime rate or the LIBOR rate, and the rates usually have a margin added to the index the loan is following. While the LIBOR index is the London Interbank Offered Rate and represents the costs of borrowing money, the Prime rate is the interest rate offered by lenders to their most creditworthy customers. Everything else being the same, it is better to have an interest rate pegged to the LIBOR index, as a rate pegged to it will rise more slowly than one linked to the PRIME index.

 

The interest rates and fees you pay on a private education loan are based on:

  • Your credit score

  • The credit score of your cosigner, if any.

 

Generally, a loan application from a student with a FICO credit score less than 650 is unlikely to get approved.

 

 


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