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private student loans

Private student loan lenders have been toughening up on their lending standards in the wake of legislation that targeted Federal subsidies paid to student loan lenders and the current credit crunch. Many student loan lenders no longer write Federal student loans and are now concentrating on private student loans exclusively.Private lenders have also toughened up their lending standards. Formerly, lenders would write student loans for just about anyone. These days, you'll need to have a much cleaner credit rating to get considered for a private student loan.

In a way, however, the tougher lending standards may be a blessing in disguise.  More stringent lending standards may actually reduce the number of student loan defaults, and may naturally rein in indiscriminate borrowing on the part of some students.  Politicians have recently called into question the lending practices of private lenders, but their scrutiny hasn't done much to address the real causes of mounting student loan debts.

The cost of college tuition has gone through the roof, and most politicians at the state and Federal levels haven't done much to address that. Additionally, most borrowers are uneducated - maybe that's why they're in school - about finances. Perhaps legislation that requires students to take in a "Borrowing 101″ course before signing on the dotted line would also help.

Despite the changes in lending standards, few - if any - private lenders have bailed on the student loan industry altogether. Until the government increases its lending caps or does something meaningful to reduce the cost of college tuition, I predict that private student loan lenders will always be there to fill in the gaps.  As with any type of borrowing, however, it's up to the borrower to understand the ramifications of signing up for a long-term loan.

Here's the deal: Federal college loans (like Stafford loans and PLUS loans) generally offer more attractive terms than private student loans. So if you're looking for financial aid for college or graduate school, you definitely want to make sure you use your federal financing options first.

But if you have education-related expenses that your federal financial aid doesn't cover, private student loans could give you the additional financial assistance you need. You can use private student loans to help pay your tuition, fees, and room and board, plus things like books, a computer, and your trips home.

You just want to make sure, if you're shopping around for private student loans, that you're informed and that you borrow smart.

Private Student Loans vs. Federal Student Loans

So how are private student loans different from federal parent or student loans?

§         No application deadlines. Many private student loans have no application deadlines, so you can apply year-round. To qualify for federal college loans, you generally have to meet an application deadline set by your financial aid office.

§         Credit-based. Private student loans are generally credit-based loans, and you may need a co-signer. Federal Stafford student loans aren't credit-based and don't require a credit check or a co-signer.

§         Variable interest rates. Many private student loans have variable interest rates. So your rate and your monthly payment could fluctuate each month, depending on the terms of your private loan. Federal Perkins Loans, Stafford Loans, Grad PLUS Loans, and PLUS Loans, on the other hand, have fixed interest rates and fixed monthly payments that won't change and are good for the life of your loan.

§         No federally guaranteed forbearance and deferment benefits. Federal parent and student loans come with forbearance and deferment benefits that may allow you to temporarily postpone making payments if you're unemployed or experiencing financial hardship. Although many private student loans allow you to defer payments while you're still in school at least half time, they may not offer any hardship forbearance or deferment options once you graduate.

§         No subsidized options. Some federal student loans, like Perkins Loans and subsidized Stafford Loans, are subsidized, which means the government will pick up the interest charges while you're still in school at least half-time or when you're in an authorized deferment period. Private student loans are unsubsidized, meaning you're responsible for all the interest charges; even if you're deferring payments while you're in school, interest is accruing that you'll eventually need to pay.

§         Your money comes directly to you, not your school. The money for federal parent and student loans goes directly to your school. After the federal funds are applied to your account, you can typically get a check from your school for any money you have left over. With private student loans, on the other hand, your check will usually come straight to you.

Student Loans: Borrowing Smart

Now that you know what makes private student loans different from federal college loans, here's how to make sure you borrow smart when you're taking out your student loans:

§         Get free money first. Before you take out any student loans, whether federal or private, get as much free money as you can first. Search for scholarships and grants, which don't need to be repaid. If you're not sure where to start, try this award-winning online Scholarship Search Engine, which lists over 5.9 million scholarships worth over $16 billion - and is absolutely FREE.

§         Apply for federal financial aid. Since federal college loans generally offer more attractive terms, like low, fixed rates and deferment and forbearance benefits, take advantage of all your federal financial aid options before you turn to private student loans.

Borrow only what you need. Although you may qualify for up to $40,000 a year for school with some private student loans, don't just take that max payout. Remember, you're going to be charged interest on that money, even if you're not currently making payments. If you need to take out a private student loan to supplement your federal financial aid, only borrow what you absolutely need to cover your education-related expenses.