Understanding Private Loans: Tips for Students

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You only spend a few years in college, but the loans that paid your way through school can haunt you for decades. Here are some tips to avoid a big pit of debt

Exhaust All Other Options First
Many families mistakenly assume they won't qualify for federal aid and decide not to apply. But unsubsidized federal Stafford loans are available to all students regardless of income, and are dispersed on a first-come, first-serve basis. So send in your Free Application for Federal Student Aid (FASFA) form as close to Jan. 1 as possible. Grants, scholarships and work-study programs should also be considered before resorting to private loans.

Compare Correctly
When you're comparing private student loans, make sure that you're looking at each loan's APR, and not its interest rate, finance charge or the loan's index or spread. Also pay attention to the fine print regarding how interest is assessed, when repayment begins, what repayment options are available and how often deferred interest will be added to the principal of the loan. This is where true borrowing costs are revealed.

Consider Community College
Many four-year colleges offer automatic admission and scholarships to community college students who transfer to their schools. Tuition and fees at public community colleges average less than half of those at public four-year colleges and about one-tenth those at independent four-year colleges.

Co-Sign Your Loan
Credit-based loans have "tiered" rates: The better your credit rating, the lower your interest rate will be, so co-signing your loan with someone with a more established credit history (like a parent or grandparent) may help you get lower interest rates.

Look Into Consolidation
Some students can lock in lower interest rates if they consolidate their loans within six months of graduation. Consolidation may also improve your credit score.

Automate Your Bill-Paying
Many loan companies offer "Borrower Benefits" like lowered interest rates if you pay on time for a certain number of months.

File a Complaint
If you believe you were the victim of unfair practices, you can file a complaint with the Department of Financial Institutions' Division of Consumer Services.