Overview

When federal financial aid doesn't cover all your education costs, private loans can help fill the gap. However, private loans have different terms and conditions than federal loans. Before borrowing, carefully compare lenders to find the best option for your situation. Consider the factors below to make an informed decision about private education loans.

For more information: Student Loans: Choosing a loan that's right for you

Interest Rates

Interest rates determine how much you pay to borrow money. A higher interest rate means you have to repay more than a lower interest rate. The expense is calculated as a percentage of the unpaid principal amount of the loan and is offered in two forms--Variable or Fixed. A variable interest rate will change periodically over the term of the loan whereas a fixed rate will not.

Learn more about interest rates

Fees

The percent or flat-rate, if any, charged to borrow a private loan. Lenders may charge other fees besides interest on the loan. A good rule of thumb is that 3-4% in fees is about the same as a 1% higher interest rate. Look for loans with no ($0) application and origination fees.

Approval Rate

The approval for a private loan is based on traditional factors like credit score and income level. In some cases, borrowers require a co-signer to apply for the loan with them so that they can get approved. Not everyone can qualify for private loans because of the more difficult approval criteria.

Co-Signer Release

Some private loans allow you to remove the co-signer from your student loan after you've made a certain number of on-time payments. The release is possible because you, the student, have proven you can repay your student loan, are not likely to default on your loan, and have also qualified as a credit-worthy borrower. By releasing your co-signer, they will no longer be responsible for your student loan debt; instead, you will be the only person responsible for repayment of the loan.

Customer Service

Look for customer reviews or experiences from other students on the lenders' website or seek out independent reviews. Questions to consider: Are the customer service representatives available 24/7? Can you apply online? How quickly will you know a decision?

Consolidation

Private loans cannot be included in a federal consolidation loan. However, if you have multiple private student loans, consolidating them into a new loan may be advantageous. You may be able to remove a co-signer at the time of consolidation, or you may be able to get rid of a variable interest rate.

Credit Check

Private loans require credit checks. Each time you apply, your credit is reviewed and your credit score is affected. If you do not have a credit history, you will need a co-signer with a good credit history and credit score. Typically, the better the co-signer's credit history and score, the better the interest rate and other terms will be.

Loan Amount

Most private student loans have several types of limits on the amount you can borrow, including the following:

• Annual Loan Limits - An annual limit specifies the maximum amount you can borrow in a single academic year
• Aggregate Loan Limits - An aggregate limit, sometimes called a cumulative limit, specifies the total amount you are allowed to borrow during your academic career
• Cost of Attendance Limit - A cost of attendance (COA) limit specifies that the loan amount must be less than the school's official cost of attendance minus other financial aid received

Repayment Plans

Repayment plans will vary by lender. Questions to consider when deciding on a lender include the following:

• Are payments required while you are still attending school?
• What is your grace period?
• Do they offer deferment/forbearance options if you are having trouble financially?

Note: Look for a loan with no penalties for early payoff.

Grace Period

The "waiting period" before repayment of student loans is called a grace period or an interim period. For most student loans, the grace period is six months from the time you graduate, leave school, or drop below half-time enrollment. However, with private student loans, there is no standard grace period because each private loan is specifically governed by the controlling loan document between the lender and the borrower.

Deferment

A period where you postpone making payments on your loan but interest may still accrue. Private loans offer very limited options for deferment but may include the following: enrollment in school, economic hardship, military deployment or unemployment.

Forbearance

A period during which your monthly loan payments are temporarily suspended or reduced. Payments on your loan are postponed, but interest will accrue during the forbearance period. Forbearance is intended as temporary relief during a financial crisis.