The best college loans are the ones available through the federal government. If you are interested in pursuing private college loans, you need to proceed carefully. Here are seven things you need to know when shopping for private loans:
1. You’re Stuck with Them
With federal student loans, there are options to help you deal with any rough patches you may encounter. This is not the case with personal loans.
If you lose your job, you won’t be able to defer payments. You also can’t select income-based repayment options. What you sign up for is what you get – and it will be hard to change that.
2. They Could be Tax-deductible
You may be able to qualify to deduct student loan interest you’ve paid, up to $2,500. There are some stipulations though:
- Your income must be less than $80,000 ($160,000 if filing jointly)
- The loan must have been solely for qualified education expenses
- The student must be you, your spouse or your dependent, and they must have been enrolled at least half-time in a degree program
See the IRS site for more details and requirements.
3. Apply for Multiple Loans
At AllTuition, a private college loan comparison site, parents research many loans, but rarely apply for more than one. Unfortunately, borrowers won’t know what rate they qualify for unless they apply.
It’s well worth the effort. “A family taking out a $12,000 private loan is paying $5,000 more in interest because the parents aren’t taking 30 minutes to shop and they only complete one application,” says Sue Kim, Alltuition’s CEO.
4. You Might Not Get the Lowest Rate
The teaser rate on private loans can look much more attractive than federal college loans. For instance, the interest rate for the federal PLUS Loan for Parents is 7.9 percent vs. some advertised rates of 3.5 percent or 4 percent.
Mark Kantrowitz, the publisher of FinAid, however, estimates that fewer than 5 percent of borrowers capture the best rate. The difference between the lowest rate and the highest rate at an individual lender can be huge.
5. Search Engines Can Help
6. You Need to Ask the Right Questions
Before committing to a private loan, ask these questions:
1. What is the interest rate?
2. Is the rate fixed or variable?
3. Is there an interest-rate cap?
4. What is the total cost of the loan?
5. Does the loan have borrower rewards?
6. What are the student loan deferment options both during and after school and are there any hardship waivers?
7. Are there any additional fees?
8. How difficult is it to consolidate loans and cut interest rates after graduation?
9. Does the loan offer penalty-free pre-payments?
10. How long is the grace period?
11. What are the borrowing limits?
7. Borrow Responsibly
Don’t borrow too much. Sure, college is a great investment, but you don’t want to hurt yourself by graduating with too much debt.
Post originally written by Lynn O’Shaughnessy