Private Education Loans
Private Education Loans, also known as Alternative Education Loans, help bridge the gap between the actual cost of your education and the amount the government may allow you to borrow in its programs. Private loans are offered by private lenders and no federal forms are required. Terms may vary from lender to lender.
For private education loans students must meet the lender's credit criteria. Creditworthy cosigners may help you qualify for a lower interest rate.
Private education loans tend to have variable interest rates and often cost more than the Federal Direct Loans that have a fixed rate. Private education loans may be less expensive than credit card debt, so it is important to check the rates of each before making a decision.
Though not required, it is strongly recommended students first seek financial aid which may include grants, work study, and Federal Direct Loans that carry low fixed rates, prior to considering private loans. This is done by completing a FAFSA and any additional required documents. Federal Direct Loans offer better repayment options, deferments, forbearance and some forgiveness options. There are no credit requirements for Federal Direct Loans for students. You should exhaust your eligibility for Federal Direct Loans before resorting to private student loans.
How much can I borrow?
The total amount from scholarships, grants, work study, federal loans and private education loans may not exceed the total cost of education.
How do I apply for a private loan?
Step 1: Contact a lender to receive a pre-approval for a Private Education Loan.
Step 2: Submit Private Loan Certification Request to the school financial aid office.
What is the Private Education Loan Applicant Self-Certification form?
When your file is reviewed for a private alternative education loan, the staff reviewing your file will send you the Private Education Loan Applicant Self-Certification.
The reviewer will enter your name, SSN and complete Section 2. Section 2 includes three items for the period of the loan:
- Cost of education
- Estimated other financial assistance
- Difference between A and B
If the answer for C is an amount, you will receive a notice that confirms your estimated disbursement dates and amounts.
You, as the applicant, must complete Section 3 of the form and provide the form to your private loan lender. Your lender will not make the first disbursement on your private loan until they have received the completed Private Education Loan Applicant Self-Certification. (Effective Febuary 1, 2010)
If the answer for C is zero, it means you're cost of education has been met by the loan, and you have no remaining eligibility. You will receive the form with a letter advising you are not eligible for the private loan.
Is there a credit check?
The lender will make the decision to deny or provide a pre-approval based on your credit score, and the credit score of your cosigner.
Do I need a cosigner?
If is better to apply for a private student loan with a cosigner even if you could qualify for the loan on your own. Just applying with a cosigner usually results in a slightly lower rate as a cosigner reduces the lender's risk. Your interest rates and fees may be based on the higher of the two credit scores. If your cosigner has a much better credit score than you, it could result in a much lower interest rate.
What is the interest rate?
Private student loans rates and fees vary based on your credit score and on your cosigner's credit score.
Private education loans typically have variable interest rates, with the interest rate tied to an index, such as LIBOR or PRIME plus a margin. The LIBOR index is the London Inter Bank Offered Rate and represents what it costs a lender to borrow money. The PRIME Lending rate is the interest rate lenders offer to their most creditworthy customers. At rate of LIBOR + 2.8% is roughly the same as PRIME + 0%. If all else is equal, and your rate is tied to the LIBOR index, it will increase more slowly than a rate that is pegged to the PRIME index.
Parents who are considering an alternative education loan may want to consider the Federal Direct PLUS loan for parents. There are several tradeoffs between these options.