For many students seeking to finance their graduate school education through loans, federal loans won’t cover the amount they need to pay for their graduate studies. For these students, and students who may be ineligible for federal loans, loans from private lenders can help, but for a price.
With the average cost of graduate school ranging between $30,000 and $100,000, depending on the institution attended, there’s little wonder why many students must finance their higher education with loans. While there are many scholarships and grants available for students, most will not cover the full cost of attending college.
While the federal student loan program is vastly larger than the private loan industry ($100 billion vs. $10 billion in loans originated annually) a substantial number of graduate students take advantage of private loans to finance their education. The estimated total of all private student loans outstanding is more than $150 billion.
Advantages of private loans
Although private loans have higher interest rates and less flexible repayment options, there are several advantages available to borrowers who take out private graduate school loans. Private loans do not base eligibility on need, but rather base it on the creditworthiness of the borrower. Many middle class families make too much to qualify for many federal scholarship and loan opportunities, but don’t have the resources to pay for college on their own. Private loans can help them finance graduate school.
Federal loans are also sometimes not available to students who have been convicted of crimes, such as drug-related felonies. Private lenders may not have similar qualms about lending to students who may have made mistakes in their past.
Federal loans often have borrowing limits that don’t allow students to borrow the full amount they need for tuition, books and fees and living expenses. Lending limits for private loans tend to be higher than those for federally-backed loans, allowing students to borrow as much as they need to finance their education.
Disadvantages of private loans
Many of the advantageous options available to students who take out federally-backed loans are not available to private loan borrowers.
Interest rates on private loans are usually higher than those on federally-backed loans. Because the federal government is not standing surety for these loans, they are perceived as more risky, thus they carry a higher interest rate which reflects that risk.
While most federally-backed loans do not take the student’s credit into consideration when determining eligibility, private lenders will. This may result in students with no credit or bad credit being turned down for a loan, or being forced to have a co-signer on the loan.
Federally-backed loans often have in-school deferments that allow students not to enter into repayment until they’ve finished their studies. While some private students loans also offer in-school deferments, others do not and require the students to make payments on their loans while they are still in school. This may actually be a benefit for working students who are attending graduate school, allowing them to go ahead and get started on repaying their loans.
If you have financed your undergraduate and graduate studies by both federally-backed and private student loans, you won’t be able to consolidate these two types of loans together. If you want to take advantage of loan consolidation when you enter repayment, you’ll have to consolidate your federal and private loans separately.
Lenders
There are a number of banks and financial institutions that provide private student loans. Some of the best-regarded ones include:
- Wells Fargo
- CitiBank
- Chase
- Capital One
Some universities may have preferred lenders, but students should be wary of these recommendations, as working with the preferred lender may be more in the university’s best interest than the student’s.
When borrowing from a private student loan lender, be sure to understand all the terms of the loan. Ask about in-school deferment, grace periods, repayment terms, fees and interest rates. Try to find a loan with a fixed interest rate and low or no fees to save money in the long run.
When a private student loan enters into repayment, it is important for the student to keep current on payments, lest he or she ruin his or her credit rating and possibly have collections or legal action taken against hm or her.
When deciding whether to obtain private graduate school loans, you should carefully consider the amount you need to borrow, your future potential for earnings, how much debt you’re willing to take on and the interest rates and terms of your loan.