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When Student Loans Aren't Enough

Though federal student loans (such as the Federal Stafford Loan) help many students to attend college, families often find that even the maximum loan amounts are not enough to pay for their education. For instance, the average cost of attendance at a four-year public school today is $12,796 and at a four-year private school, it’s $30,367— yet the most money first-year college students can borrow under the Federal Stafford Loan program is only $2,625!

How do families close that gap?

According to the College Board, students are relying more heavily on private loans—the fastest growing component of funds used to finance college. But just what are “private loans?”

In the education world, colleges often refer to loans made directly by banks and other lending organizations as “private” or “alternative” loans in order to distinguish them from federal loans. Private loans can be used alone or to supplement federal loans. Technically, they are consumer loans that can be used for education purposes.

As with other consumer loans, borrowers must demonstrate that they meet credit guidelines. For students, who often have limited or no credit history, a creditworthy cosigner may be needed. What sets education consumer loans apart from other consumer loans is that collateral is not required to secure the debt (as it is for a car loan or a home equity loan) and, in many cases, repayment of the loan can be postponed while the student is in college.

What’s the difference between federal and private loans?

The main difference between federal loans and private loans is that the government “guarantees” federal loans against default. If a borrower defaults on repaying a federal loan, the government repays a portion of it. Many lenders actually provide the funds for both federal and private education loans. Because there is less risk to a lender with a federal education loan, interest rates are generally lower for those loans than for private loans— for which a lender assumes all risk that the loan will be repaid.

* Federal Loans Financial aid forms required

* Loan limits determined by grade level

* School must authorize the loan amount

* Funds are sent to the school

* Satisfactory Academic Progress required to receive additional loans

* Standard 10-year repayment term

* Restrictions on how loan may be use

* Private LoansFinancial aid forms not required

* Higher loan limits

* Faster application process

* Funds may be sent to borrower

* Longer repayment terms

* Repayment options

* Less restrictions on how loan may be used (as for a computer for college or transportation)

How do families know if they should choose a private loan?

For those families who find that a federal student loan isn’t enough, there are several options. If parents are willing, they may choose to leverage their home, retirement or investments to help pay for their child’s college education. They may also consider a Federal PLUS Loan (Parent Loan for Undergraduate Students). PLUS loans are made in a parent’s name, but unlike student loans, repayment generally begins immediately after receiving the loan.

For families who prefer that students receive the loan in their own name, a private loan may be the answer, and there are several private loans available today. Some require that the school authorize how much a student may borrow, and some do not. Some private loans allow a student to postpone all payments of both principal and interest, and some will require at least interest-only payments while in college. Some allow for fast loan application and pre-approval by phone or online. Some send the loan funds to the school and some send the funds directly to the borrower.

Before selecting a bank or other lending institution for a private loan, determine what your needs are, then find the private loan product that best meets those needs. And though “education pays” in higher income earnings by educational attainment, remember to borrow only what’s necessary to help keep your loan repayment manageable.