Private student loans get a bad rap. Their repayment terms are not as flexible as federal student loans. You generally need good credit to qualify. And interest rates often are variable, which means costs can go up if rates start to rise.
But sometimes you can't get around borrowing private student loans. You may need the loan to cover the gap between federal aid and the cost of college, for example.
So if you're a student or parent filling out financial aid applications for college (which became available starting in January for the 2015-2016 school year), keep these points in mind about private student loans.
Rates are low — for now. Private student loans have gotten cheaper in recent years. Rates at Discover Student Loans, for example, start at 3.49 percent. At Sallie Mae, rates are as low as 2.25 percent.
Compare that with federal loans, which currently charge 4.66 percent and up. In addition, there are no so-called origination fees on private loans, which are charged when the loan is created. With federal loans, you pay either 1.073 percent or 4.292 percent of the amount borrowed, depending on the type of loan.
Just keep in mind that private student loan rates are often variable, meaning the rate will fall or rise along with broad interest rate trends. (The rates on federal student loans are fixed for the life of the loan.) With interest rates near all-time lows today, there's a good chance the cost of private student loans will increase in the future.
"Variable rates have nowhere to go but up," said Mark Kantrowitz, senior vice president and publisher of Edvisors.com, an online financial aid resource.
So Kantrowitz suggests adding four percentage points to the current interest rate on private student loans for a more realistic estimate of what you could pay over the life of the loan. Lenders also offer private student loans with fixed rates. The rates tend to be higher than variable-rate loans, but may be worth considering since you won't risk a big rate jump.
You need good credit. To get the best rates on private student loans you need excellent credit. (Credit scores are not a factor with federal loans.)
At Sallie Mae, for example, the average borrower has a FICO credit score of 750. FICO scores range from 300 to 850, with 850 being the best score you can earn.
Many students, just beginning to build a credit record, do not have a strong FICO score. So to get the best rates, you may need a co-signer, such as a parent, who has a high credit rating. (A co-signer is as legally responsible as the primary borrower for repaying the loan.) At Sallie Mae, 90 percent of loans have a co-signer.
Shop around. During the 2007-2009 recession, many lenders stopped offering private student loans. But in recent years, a growing number of banks, credit unions and other institutions have returned to the market. Many states also have loan programs, too.
"It is a livelier market today, and competition generally benefits the consumer," said Patrick Kandianis, co-founder of SimpleTuition, an online marketplace for student loans.
To attract customers, lenders may offer perks, such as an interest rate discount if you sign up to make automatic payments or open a checking account.
"A lot of these deals deal get announced in March or April, so keep your eyes and ears open," Kandianis said.
Other terms can help lower your costs, too, such as making in-school payments on the loan or signing up for a short repayment period after school. Shop around. Start with websites such as simpletuition.com or privatestudentloans.com.
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ABOUT THE WRITER
Carolyn Bigda writes Getting Started for the Chicago Tribune. yourmoney@tribune.com.
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