If you’re an upcoming college student considering all your student loan options, there are a few things you should know about private student loans. Private loans are an alternative to federal loans. When applying for federal loans, there are limits to how much you can borrow each year. For this matter, many students have to supplement with private loans. This is an excellent way to meet educational costs, but there are things you should know about private student loans before borrowing.
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1. Offered by Banks
Of all the things you should know about private student loans, understand that these loans are not offered by the federal government. To acquire a private loan, you have to contact a private lender or bank. You need to complete an application the same as if you’re applying for a federal loan, but unlike federal loans, there are stricter requirements for a bank loan.
2. Need a Good Credit Score
If you’re applying for a federal student loan, credit history doesn't matter. This is why these types of loans are popular. Certain types of federal loans do require a credit check, but for the most part, undergraduate and graduate students can get federal financing with no credit history or a low credit score. This is not the case with private loans. Banks do check credit scores, and those with a bad history may not qualify.
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3. May Require a Cosigner
Because most federal student loans do not require a good credit history, cosigners aren't necessary. Unfortunately, students who apply for a private bank loan with no credit or bad credit will need a cosigner, such as a parent. The cosigner is responsible for the debt if the student can't repay the loan.
4. Some Banks Offer Deferment Options
Like federal student loans, many private student loan lenders also offer deferments. With a deferment, students are not required to make payments while in school. In many cases, banks will defer student loan payments until six months after graduation.
5. No Forbearance Option - Maybe
One attractive feature of federal student loans: flexible repayment terms. For example, if you experience any type of economic hardship that prevents repayment of a federal loan, you can apply for forbearance and skip your payments for a certain number of months. Unfortunately, private student loans may or may not offer this provision - it all depends on the bank.
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6. Higher Interest Rates
Because private student loans are offered by banks and not the federal government, students who apply for private loans will pay a higher interest rate. This is important to know because interest can impact the amount of student loan payments, as well as how long it takes to repay the debt. For students applying for private loans, it's smart to shop around and compare rates before choosing a lender.
7. Interest May Be Deductible
Regardless of whether you apply for a federal or a private student loan, you can write off the interest on your yearly taxes – up to $2,500. This provision can reduce your tax liability, resulting in a larger refund. Talk with your tax preparer for additional information and to discuss eligibility.
Private student loans sometimes get a bad rap because they don't offer the best terms. However, if a federal loan isn't an option, or if you need additional funds, a private loan can come to your rescue.
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