By MELANIE LOCKERT
After applying for financial aid and receiving federal student loans, you may realize that you need additional funding to pay for college. What are you to do?
If you've exhausted your other options, you may need to take on private student loans to cover the gap in funding.
Here are seven important things you should know about being a private student loan borrower.
1. You'll probably need a co-signer.
If you're looking to take on private student loans, you're probably going to need a co-signer. A co-signer is someone who shares legal responsibility of your debt.
"More than 90 percent of private student loans require a co-signer, which is typically a parent," says Mark Kantrowitz, financial aid expert and publisher at PrivateStudentLoans.guru.
Co-signers can improve your chances of getting approved for a private student loan, but there may be difficulties down the line for borrowers and co-signers alike.
When asking a potential co-signer to co-sign a loan for you, it's important to discuss a plan for paying back the loan in the event you are unable to make payments. It's an important conversation to have because co-signing a loan may create a shared responsibility for the full term of the loan, which is usually several years.
2. Co-signer release is unlikely.
Having a co-signer may help you get approved for a private student loan and score you a better interest rate. At some point, though, you may decide you want to remove your co-signer from her obligations through a process called co-signer release.
This process would make your co-signer no longer liable for the loan; you, the primary borrower, would be the only one responsible for the loan.
"Some lenders offer co-signer release, where the co-signer can be removed from the loan after 12 to 48 consecutive months of on-time payments by the borrower, if the borrower satisfies credit and income criteria sufficient to qualify for the loan on his own," Kantrowitz says.
Some borrowers have reported issues with auto-defaults when their co-signer died -- in other words, their loan was immediately placed in default and became due in full.
Co-signer release can help avoid this stressful complication, but it's difficult to get approved. "Less than 1 percent of borrowers qualify for co-signer release," Kantrowitz says.
If a co-signer release is important to you, ask your lender before you take out the loan.
One alternative is to refinance your student loans, effectively paying off your old student loans and taking on a new loan, potentially at a better interest rate.
If you successfully refinance, you release the co-signer from any obligation to pay back your loan (as the old loan would be paid off).
You may need to have excellent credit and income to support the new loan, but it may be easier than getting approved for a co-signer release.
3. Private student loans typically have fewer borrower protections than federal student loans.
Many federal student loans offer a variety of repayment options that can benefit borrowers, such as income-based repayment, deferment, forbearance and student loan forgiveness under certain programs.
Private student loans? Not so much.
Student loan lawyer Joshua Cohen explains that some private student loan lenders may offer some deferment options, where you can temporarily postpone your payments, but getting your loans forgiven or having your payments based on income isn't typically an option.
4. You may have difficulty discharging your private student loans if you become disabled.
Nobody wants to imagine scary "what-ifs" such as becoming disabled. However, if you become disabled and have private student loans, you may have a difficult time getting them discharged.
"Federal loans can be discharged if the borrower is totally and permanently disabled. Not many private loans offer this," Cohen says.
He adds that it's often at your lender's discretion if discharge is granted.
5. Interest rates on private student loans can vary widely.
For the past several years, federal student loan interest rates have been fixed rate. Private student loans, on the other hand, can be either fixed or variable.
"Private loans are available in both fixed and variable interest rates. Variable rates may initially be lower, but can increase over the life of the loan," Kantrowitz says.
If you have a co-signer and good credit, the interest rates may be competitive. If you don't, the rates can vary widely.
"Federal loans are capped at 8.25 percent and are currently running at about 3.76 percent for 2016 to 2017. Private loans can range anywhere from 2 percent (with excellent credit and income, usually with a co-signer) up to 16 percent," Cohen adds.
6. You may or may not have a grace period.
Many federal student loans have grace periods, which is a fixed time you don't have to make payments on your loans, typically for six months after you graduate.
Private student loans, on the other hand, may not offer a grace period, which means you may have to start making payments while you're still in school or right after you graduate.
If you think you might not be able to make payments right away, consider researching private loans that offer a grace period or more flexible repayment options.
7. Taking on private student loans could mean you're over-borrowing.
Students should pursue scholarships, grants and federal student loans to pay for college. But if that's not enough, private student loans may be your last resort.
Taking on both federal and private student loans can be difficult -- it means you'll have at least two lenders, two payments and two different interest rates (and possibly many more of each).
These payments can add up quickly and managing multiple payments can be tough. Not only that, but taking on private student loans may mean you're over-borrowing.
You may think you'll be able to pay your student loans back easily, but Cohen warns borrowers about taking on too much, especially with a co-signer.
"If you and/or your parents are dead set on getting a private loan, find a repayment calculator online and run the numbers," Cohen says. "Figure out what the repayment would be then quadruple the amount needed for the first year [to calculate for the period of your degree]."
For example, if you need $15,000 the first year, that could mean you'll need a total of $60,000 in private student loans. Many experts recommend only borrowing an amount equivalent to what you estimate will be your first annual salary out of college.
Unfortunately, getting a job making $60,000 right after graduation may be tough.
If you're thinking of taking out private student loans to fund your education, make sure you've exhausted all of your other resources first.
Private student loans can help fund your education, but they also typically come with fewer borrower protections and generally aren't as flexible as federal student loans.
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