Tips Regarding Alternative Private Loans

(as reported by Fox Business News)

 

Use up Federal Loans First 

Before you start shopping in the market for a private student loan, make sure you have exhausted every opportunity for federal financial aid. Federal loans have fixed interest rates and allow you to defer payment while you are in school and during times of economic hardship.

 

Know the Interest Rate Formula

The interest rate on your loan will be tied to either the prime rate or the London interbank offered rate, or Libor. The best deals are no-fee loans whose rates are based on Libor plus 2% or prime minus 0.5%, similar to what the Federal PLUS Loan program offers.

 

Add Up the Total Cost

Lenders must make certain disclosures available at the time of a private student loan application and prior to the disbursement of the loan. That information includes the total loan amount, the interest rate and the terms of repayment.

Loan origination fees can add significantly to the cost of a private student loan; a fee of 3% to 4% at the outset of the loan can have an impact equal to a 1% spike in the interest rate over the life of the loan.  Another caveat is that a longer repayment term increases your total interest payment even as it reduces the annual percentage rate of the loan.

 

Rewards for Good Behavior

Some lenders offer special perks like reducing your private student loan balance or your interest rate when you graduate, or when you set up an automatic payment system.  For borrowers who sign up to have their principal and interest repayments deducted from their bank accounts automatically, many banks will lower the interest rate by a nominal amount such as 0.25%.

Another example of a reward? Many banks offer to release co-signers from their obligation once the borrower has made a certain number of consecutive monthly, on-time payments.