A “private student loan” is a financing option for higher education that can either be a supplement or replace federally guaranteed loans. Interest rates are set by the financial institution that underwrites the loan, typically based on the perceived risk that the borrower may be delinquent or in default of payments of the loan. The underwriting decision is complicated by the fact that students often do not have a credit history that would otherwise indicate creditworthiness. So, interest rates vary considerably across lenders.
Private student loans are subject to special treatment in the event of a personal bankruptcy, students may not incur a total debt in excess of the cost of attendance, taking into account scholarships, federal loans and private loans.
These loans are not guaranteed by a government agency and are made to students through finance companies or banks. Private student loan says that they combine the best elements of the different government loans into one. They offer higher loan limits then federal student loans, making it sure to the students that they will not left with a budget gap. However federal parent loans generally offer a grace period with no payments due until after graduation. This grace period may range high as 12 months after graduation while private lenders offer six months grace period.
A loan with a low interest rate but high fees can cost more than a loan with a somewhat higher interest rate and no fees. The lenders that do not charge fees often roll the difference into the interest rate. A good rule is that 3% to 4% in fees is about the same as a 1% higher interest rate. Best private student loans will have interest rates of LIBOR + 2.0% or PRIME – 0.50% with no fees.
Unluckily, these rates will often be available to borrowers with great credit who also have a creditworthy cosigner. It is not yet clear that how many borrowers qualify for the best rates, though the top credit level typically include about 20% of borrowers.
