In general, many financial aid professionals will advise you to always consider federal loans first before pursuing private loans, especially since you can borrow up to the full cost of your attendance with federal loans, assuming you need to. However, if you are considering a private loan in lieu of or in addition to federal loans, there are a number of questions to ask your loan provider that may help with your decision. Remember that while the interest rate is important, there are other factors to consider before you take out a private loan. Additionally, there are two principles to
keep in mind about private loans and how they may impact your overall repayment strategy:
First, it is often best to pay down
private loans as quickly as possible because even if the private loan's interest rate is lower than your federal loans, the repayment and postponement options are not as flexible.
Second, borrowers with both federal
and private loans who have monthly cash flow challenges may need to use the
repayment and postponement flexibility provided on their federal loans to
remain current on their private loans.
We suggest you contact the loan
provider(s) for your private loans, or their loan servicer, to ask the
following questions regarding your private student loans:
Interest Rate and Capitalization
- What is the current rate being offered?
- Is the rate variable or fixed, and if variable, is there a maximum (cap) and minimum (floor)? In other words, how high and how low can the rate go?
- If the rate is variable, how often is it reset and how does that impact your subsequent payments? This is extremely important as it can adversely impact your cash flow during repayment.
- Does the rate increase when you enter repayment? This is a provision in some private loans that oftentimes is overlooked, but extremely important for you to know.
- Are there any discounts on the rate you might be eligible for, such as ACH (automatic debit) or discounts for timely payment?
- How often is accrued and unpaid interest added back to the principal of your loans (called capitalization), and is this more frequent during times of postponement? This is important because it can cause private loan balances to grow dramatically.
Repayment Options and Term
- How long do you have to repay these loans?
- Are there other repayment options such as “interest only” for a designated period of time, in case you need short-term help reducing your payments? What is the impact on your balance?
- Are there any repayment options based on your income?
- Can you target additional payments against the principal of your loans to pay them faster?
- How long can you postpone payments, if needed?
- Is there a fee to postpone payments, and is this with a deferment or forbearance?
- How do you renew your deferment or forbearance if you need to postpone for a longer period of time, and what are the implications for doing so?
- Is there a fee to postpone payments on your private loans?
- How often does interest capitalize during postponement?
- Is there a cosigner required and what are the benefits of having a creditworthy cosigner?
- Is there a cosigner release provision, and if so, how does it work?
- Is there a minimum credit score and maximum DTI (debt to income) ratio you must meet to have your cosigner dropped from the loan?
- If you are denied your request to drop your cosigner, can you reapply later?
- Is the loan forgiven in the event of your death or disability, or is the co-signer liable for repayment at that time?