As a general rule, students should only consider obtaining a private education loan if they have maxed out the Federal Stafford Loan. They should also file theFree Application for Federal Student Aid (FAFSA), which may qualify them for grants, work-study and other forms of student aid. Undergraduate students should also compare costs with the Federal PLUS Loan, as the PLUS loan is usually much less expensive and has better repayment terms.
The fees charged by some lenders can significantly increase the cost of the loan. A loan with a relatively low interest rate but high fees can ultimately 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 of thumb is that 3% to 4% in fees is about the same as a 1% higher interest rate.
Be wary of comparing loans with different repayment terms according to APR, as a longer loan term reduces the APR despite increasing the total amount of interest paid. FinAid's Loan Analyzer Calculator may be used to generate an apples-to-apples comparison of different loan programs.
The best private student loans will have interest rates of LIBOR + 2.0% or PRIME - 0.50% with no fees. Such loans will be competitive with the Federal PLUS Loan. Unfortunately, these rates often will be available only to borrowers with great credit who also have a creditworthy cosigner. It is unclear how many borrowers qualify for the best rates, although the top credit tier typically encompasses about 20% of borrowers.
Generally, borrowers should prefer loans that are pegged to the LIBOR index over loans that are pegged to the Prime Lending Rate, all else being equal, as thespread between the Prime Lending Rate and LIBOR has been increasing over time. Over the long term a loan with interest rates based on LIBOR will be less expensive than a loan based on the Prime Lending Rate. About half of lenders peg their private student loans to the LIBOR index and about 2/5 to the Prime lending rate.
Some lenders use the LIBOR rate because it reflects their cost of capital. Other lenders use the Prime Lending Rate because PRIME + 0.0% sounds better to consumers than LIBOR + 2.80% even when the rates are the same.
It is not uncommon for lenders to advertise a lower rate for the in-school and grace period, with a higher rate in effect when the loan enters repayment.
Federal student loans are not available for expenses incurred by law, medical and dental students after they graduate, such as expenses associated with study for the bar or finding a residency. There are two types of private student loans for these expenses:
- A Bar Study Loan helps finance bar exam costs such as bar review course fees, bar exam fees, as well as living expenses while you are studying for the bar.
- A Residency and Relocation Loan helps medical and dental students with the expenses associated with finding a residency, including interview travel expenses and relocation costs, as well as board exam expenses.
