The two types of student loans are federal loans and private loans.Federal loan is backed by the government, where as private loan is what that is given out to students by banks or private finance companies. Most students prefer to opt for private loans as they do not have to go through a tiring process of the federal loans. Private student loans are classified into two types: school channel and direct to consumer.

School Channel Loan:

Usually schools or institutes play the role of a loan channel through which the student can get a loan. These loans are low interest and are certified by the specific school. So when a student needs a loan , he doesn’t need to go anywhere, but simply approach the school for the particular loan. The school signs a specific amount of loan money and the funds are expended to the school.

Direct-to-consumer Private Loans

In a direct to consumer loan, there is no school involved and a student takes a loan on his own. All he has to do is approach the particular company, verify enrollment, and wait for the loan to process. The one disadvantage to direct consumer loan is the high interest rate as it is not done through a medium channel. On the other hand direct to consumer loan does not take long for completing the loan process and within days the student can have the amount in his hands. Most of the times students need money quick,so this loan service is commonly approached.

No matter what kind of private loan a student applies to, there is always a high amount of variable interest rate, unlike federal government loan where there could be a fixed amount of interest rate. Not only the interest rate, but the upfront fee is also quite high and thus the borrower ends up working to repay off debts instead of on educational pursuit. The reason of this variability in interest rate is because loan companies are partnered with the market index and thus when ever there is a fluctuate in market prices the interests either go up alot or goes low.

A student must understand is that private loans are full of risks. They mainly have hidden details which is only let out later on, and the interest rate itself can cause a person go bankrupt. For such issues then there is private student loan consolidation, another loan business that allows borrowers to consolidate their debts. For a long time now, there has been a lot of messy happenings in the process of private lending where universities collaborate with their preferred companies and thus an unaware student is caught off guard with high interest rates.

Because of all this, the government has now imposed strict laws on student private loans and now universities have changed policies. In some cases they even have to pay back millions of dollars to students who were victims of such unfair policies.

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Rana Mansoor Akbar Khan

Rana Mansoor Akbar Khan

Financial Blogger. Tech Journalist. Freelance web developer.

1 Comment

  1. June 29, 2010 at 6:20 am

    I have a 529 plan for my young son. I like the idea of the 529 plan and how it is structured. However, I am not sure that investing in stocks is the way to go. Let’s face it, from 2001 to 2010, the stock market has not been a great investment vehicle. I would also consider bonds, while they are not sexy, you are not going to lose money either.