Updated 7/22/08
Students who aren't getting enough financial aid and government-backed loans can turn to banks or other private lenders to raise college cash.
- What are private loans?
- How much can I borrow in a private loan?
- How much do private loans cost?
- Who makes private loans?
- How do I get a private loan?
- Does everyone get approved for a private loan?
- What happens if I get rejected for bad credit?
- What happens if I get rejected because the lender just doesn't want to make any private loans?
- How is the credit crunch affecting private loans?
- Are private loan payments tax deductible?
- When do I have to start paying back my private loan?
- What happens if I lose my job or get into other financial trouble?
- What are the advantages of private loans?
- What are the downsides of private loans?
What are private loans?
Loans made by banks or other private lenders without any government subsidy. These also are sometimes called signature loans or alternative loans. The Project on Student Debt has a useful Q&A on private loans.
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How much can I borrow in a private loan?
Each lender's terms are different. Some will lend the student's cost of attendance; others have a cap of $40,000 a year or less.
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How much do private loans cost? *Updated
It depends. In the summer of 2008, lenders were offering borrowers with top credit introductory interest rates around the Prime rate. But those rates went only to those who had already established excellent credit or got a parent or some other adult with excellent credit to guarantee (or "cosign") the loan. Since those rates are variable, they will rise if the Prime rate jumps up, as it generally does from time to time. U.S. News offers a web tool to help you shop for private loans. Taxpayers with low and middle incomes can deduct their education loan interest payments, further reducing the cost of the loan. Virgin Money, Fynanz, and Greennote have launched new services to help friends and relatives lend to each other at lower rates.
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Who makes private loans? *Updated
Banks, private lenders, nonprofits, and possibly your friends or relatives. To search the Web for private loans, click here http://www.simpletuition.com/usnews/home. If you can find a friend or relative to lend you the money, consider Virgin Money, Fynanz, or Greennote
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How do I get a private loan?
You must fill out an application with your chosen lender and notify your school. The school will want to make sure you've exhausted all other financial aid options before turning to these loans, which are generally rather expensive.
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Does everyone get approved for a private loan?
No. In 2008, turmoil on Wall Street forced lenders to become much more picky about whom they'd make a private loan to. Students who want to borrow money on their own--without getting someone else to promise to make payments if they don't—will probably have very little luck finding a private loan.
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What happens if I get rejected for bad credit?
If you can find someone with good credit to cosign, which means committing to repaying the loan if you can't, you can reapply.
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What happens if I get rejected because the lender just doesn't want to make any private loans?
You can keep searching for other lenders, using services such as Graduate Leverage. One way to avoid this problem is to avoid the lenders who've already announced they are suspending or ending their education loan programs. Lists can be found through FinAid and the National Association of Student Financial Aid Administrators.
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How is the credit crunch affecting private loans?
Many lenders have stopped making loans, because investors are charging them very high prices for the funds they want to lend out to parents. As a result, many counselors are advising students to line up a lender, apply for their loan, and lock in terms as soon as possible. They recommend you get your application in at least a month before classes start.
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Are private loan payments tax deductible?
It depends on your income and how much of the loan you use for education purposes. Currently, the deduction is allowed only for single people earning less than $70,000 and couples earning less than $140,000.
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When do I have to start repaying my private loan?
Each lender's terms are different. Most generally start sending bills right away. Some allow you to wait until you've finished school. But even those who delay billing are adding interest to your total debt, so that when the bills do start arriving, they'll be for a higher total.
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What happens if I lose my job or get into other financial trouble?
You can call your lender and ask for help, the same way you would with your mortgage and credit card companies. But beware: Even if you are allowed to skip some payments, lenders typically keep adding on interest, so you'll owe a lot more when you start repaying again. The National Consumer Law Center has lots of good advice.
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What are the advantages of private loans?
For some students, private loans are the only way they can fund their education.
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What are the downsides of private loans?
Private loans tend to be very expensive. They can burden students with huge bills after they graduate. Worse, unlike credit card debt and mortgages, which can be canceled if you file for bankruptcy, education loans of all types must be repaid. Most bankruptcy courts will not cancel them unless your situation is extremely dire. In addition, most private loans come with floating interest rates, so payments will rise if interest rates rise, which they generally do from time to time.
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