Your child’s graduation from high school and transition toward college is one of the most exciting milestones of their life—for both of you.
At least until that first bill shows up.
Deciphering the financial aid award letter is one thing , but figuring out how much you’ll have to pay is another as the award doesn’t cover the full amount. What happens if your family doesn’t have the ability to pay the remaining amount?
You could help your child look into other educational options for the upcoming fall semester. However, if their heart is set on a particular college and you don’t have the money, you might be thinking about taking out a private student loan—but you’re not quite sure what the implications are. How will it affect your family’s financial future?
Let’s get you started—here are the answers to some of the top questions our financial aid counselors here at IPFW get about private student loans.
What is the difference between a federal student loan and a private student loan?
For one thing, a federal student loan comes from the government. Private student loans come from private organizations like banks or credit unions.
A federal student loan is normally much more flexible to repay and can be subsidized—which means the government covers the interest while you’re in school. They also have fixed interest rates.
Private student loans don’t have any of the parameters that federal student loans do. They’re just loans like you would get to buy a house or a car. To get a private student loan, you need to qualify for one based on your credit report—and if it’s a private student loan that can hold a candle to a federal student loan, you’ll need to have amazing credit.
According to this article, “The best private student loans will have interest rates of LIBOR + 2.0% or PRIME – 0.50% with no fees. Such loans will be competitive with the Federal PLUS Loan. Unfortunately, these rates often will be available only to borrowers with great credit who also have a creditworthy cosigner. It is unclear how many borrowers qualify for the best rates, although the top credit tier typically encompasses about 20% of borrowers.”
Additionally, here is an article from the government comparing private student loans with federal loans.
When will you have to pay back a private student loan?
Unlike a federal loan, you’ll likely have to begin paying back a private loan while your child is still in school. There’s no way around that.
What if you don’t pay it back?
Like any loan, avoiding payments will hurt your credit score (or your child’s if the loan is in his or her name), which could hurt your chances of buying a car or buying or renting a house.
This all sounds pretty bad. Should I still do it?
Under the right circumstances, a private student loan might be worth the risk—like if you know you or your child will have the money to pay it back in a timely manner after graduation.
According to this US News article, “Research into starting salaries and employers hiring grads from your school can help you project the likelihood of what you’ll be able to pay, whether you’re borrowing through a federal program or a private lender.”
In the majority of other cases, private student loans are considered last resorts. Before taking that loan, consider applying to other schools (with rolling admissions, perhaps), starting at a community college, or searching for scholarships.
To learn more about private student loans and other loans that will help you and your child pay for their college education, download the Financial Aid Quick Guide to Student Loans.