Student Loan Dodgers

Private student loan lenders have taken a lot of heat lately from Congress and borrowers alike. The truth, however, is that consumers overwhelmingly turn to private student loans when it comes to college education. Most private student loan lenders advise their borrowers to exhaust all other forms of financial aid before borrowing private loans, yet some students and their families turn to private funding sources first.

The interest rates on private student loans are generally higher than what you can find through the Federal government. Then why do people turn to private lenders? People choose private student loans for a few reasons.

First, the Federal government imposes lifetime borrowing caps on students and parents alike. The caps haven’t been adjusted in many years, and don’t reasonably reflect the amount of money it takes to complete an undergraduate degree. When students and their families do exhaust their Federal student loan options and personal savings, they have little choice but to look at borrowing from retirement funds, home equity, or private sources.

Second, private loan lenders offer more flexible borrowing plans than the Federal government does. Aside from being able to borrow more, private loan lenders can also include borrowing incentives that make their student loans more competitive, or give their private loans more attractive terms for a given borrower’s situation.

Third, in the past, private student loans have been relatively easy to get. This is changing, as private lenders tighten up on their lending standards. Part of the reason for the crunch is that private lenders are now finding it more difficult to sell student loans to other lenders. This inability to sell loans in bundles is considered fallout from the sub-prime mortgage problems we’re also seeing.

If you are considering a private student loan, do your research. Shop around for the best deals you can find, and carefully examine the terms and incentives a private lender is offering. A quarter-point reduction in interest may not seem like much, but over the course of a loan’s lifetime, it could add up to thousands of dollars.