Should Students Leap at Non Federal Student Loans?

Non federal student loans have given college students more options in financing their college careers. While it used to be that students were left with no choice but to take advantage of financial assistance provided by the federal government, they now have more choices with the presence of private loan providers. The volume of such loans has been steadily growing, with its movement notably higher than the increase in volume of federal student loans. If this trend continues, it is projected that private loan sources will surpass the student loan volume provided by the federal government by 2025.

Supposedly, general rules dictate that a student should only make non federal student loans an option once he or she has already maxed out his or her federal loan, usually the Stafford Loan. Before considering a private loan, they should also first submit the Free Application for Federal Student Aid (FAFSA), which may make them qualified for various forms of student aid like grants and work-study programs. Undergraduate students should also compare first resort to a Federal PLUS Loan, which is usually more affordable and has more flexible payment terms. Unfortunately, this is not the case anymore as more and more students try to get non federal student loans to cover for miscellaneous expenses, while they use federal loans for tuition costs.

What students and potential borrowers need to be wary about non federal student loans, is of course, its fees. As private businesses, these loan companies primary goal is to maximize profit, even at the expense of students. Cruel as it may look, that’s how businesses are structured. Thus, it is inevitable that fees charged by a majority of lenders are higher than their federal counterparts, making repayments bigger. A loan with a low interest rate but riddled with high fees can certainly cost more than a loan with no extra fees but has a somewhat high interest rate (which is what federal student loans are supposed to be). When finding non federal student loans, one should remember that fees at the 3 to 4 percent level would be about the same as a 1 percent increase in interest rates.

Among non federal student loans that would be favorable to students would be those that have an interest rate of LIBOR (London Inter-bank Offered Rate) + 2 percent or PRIME RATE at 0.5 percent with no included fees. Although these loans may be available, they may only be offered to borrowers that have good credit standing, and only around 20 percent of borrowers qualify as such.

Moreover, students interested in private loans should make sure they are well-versed about the fine print of these loans. Most of them are advertised at a low rate for grace period and in-school periods, but once the loan is already repayment period, the rate changes.

However, there are indeed loans for students provided by private businesses that would be very beneficial since there are not really federal equivalents for them. These include non federal student loans for law students in the process of taking their state bar exams and relocation and residency loans for students in the medical and dental field who are in the midst of preparing for their residencies and board exams.