Private education loans may be available to students who have very good credit. We do not recommend or endorse the use of private loans but recognize this is an option for you. Private loans differ from federal loans in several significant ways:
- Private loans are not federally guaranteed and not regulated or monitored by the U.S. Department of Education.
- Interest rates are variable, usually with no cap (the rate can go up or down any time after you borrow).
- Processing fees may be higher than federal loans.
- Private loans are issued only to students who have good credit
- Credit worthy co-signers may be required if the student has bad credit.
- Since there is no guarantee or subsidization, private loans are usually more expensive.
- Repayment periods may be longer, resulting in higher interest costs.
- Private loans have no deferment option, but lenders may offer forbearance.
- Private loans are not forgiven in the event of death or disability.
- They may not be consolidated with Federal loans.
- Private loans are not eligible for Federal Public Service Loan Forgiveness.
We recommend you maximize your eligibility for Federal Direct Unsubsidized and FederalGrad PLUS Loans before considering a private loan.
Which Private Loan is Best?
A common question we are asked is, "which private loan is best?" Unfortunately there is no easy answer. As with many things financial, the honest answer is, "it depends". On what does it depend?
One factor is interest rate. This one appears obvious, but it is not. Lenders obtain their funding in a number of different ways. Some borrow it, some take the loans to the financial markets, and some take it from other assets of their corporation. Not surprisingly, these funds may have different costs to the lender. Lenders then often set interest rates to reflect the "index" at which they borrow. Private educational loans may be indexed to the Prime Rate, (Prime), the London Interbank Offering Rate (LIBOR) or the US short term note, the 91-day Treasury Bill (T-bill).
Visit bankrate.com/brm/ratehm.asp for the current rates on these major indices. Lenders may use other indices (10 year T-Bill, various mortgage bond indices, and others) but most are using Prime, LIBOR or the short-term 91-day T-bill. A "spread" is the additional interest that is added to the index rate. It is the combination of the spread and the interest rate that should be considered as you estimate the actual interest rate. When estimating and comparing the interest rates, be sure to add the spread to the index.
Another factor is the fees that the lenders charge. Lenders build default insurance costs into to the interest rates. There are lenders who may assess the fees based on the risk of default, as estimated by the borrower's credit score. The less risky the loan, the lower the fees.
Because of the current uncertainty in the credit markets, many lenders have decided to tighten the underwriting of their private student loans and adjust the pricing of these loans. Borrowers will be required to meet higher credit standards and pay a higher price for these loans. If you still wish to borrow through the private sector, it is always a good idea to apply for a private loan with a creditworthy co-signer who has excellent credit in order to get the best deal.
Grace periods on private loans range from 6 to 9 months, although you may begin repayment earlier, if you wish. Many of the lenders have overall borrowing limits including undergraduate borrowing. These limits are set based on the lender's assessment of the ability of the average law graduate to repay the loans. Generous repayment incentives seem to have gone by the wayside, but all seem to have kept the .25% interest rate reduction for automatic bill payment. Most private loans do not carry penalties for prepayment, but that is worth checking before signing on the dotted line.
Congress has mandated that private loan lenders require borrowers to complete a Private Education Loan Applicant Self-Certification Form when requesting a private education loan. Borrowers must complete the form and send it to the lender with the private loan application. Your cost of attendance and estimated financial aid for the academic year are needed to complete Section 2 of the Self-Certification. This information is available in the Financial Aid section at my.fordham.edu. To access your account, log into my.fordham.edu using your AccessIT ID and password and click on the Financial Aid login. Click on the "Awards" tab. Listed there will be your total budget for the academic year and your estimated financial aid for the year. You will be required to fill in the difference between these two figures on line C of the Self-Certification form.