Personal Student Loans

Attending college is an important goal shared by many high school students and adults, but paying for the high costs of a college education can be a financial hardship for many families. Federal loan and grant programs are available to help cover the cost, but you may find the need for personal student loans to pick up a portion of school expenses. As a part of the private student loan industry, you should not take out a personal student loan until you understand how it differs from a federal student loan.

A federal student loan requires completion of the Free Application for Federal Student Aid (FAFSA) to qualify for loan and grant money. Rather than using credit history like a traditional loan, the government uses a formula to determine how much they expect your family to contribute to your education. Based on the amount of the contribution, you receive grants, subsidized loans or unsubsidized loans. The only difference between the two loans is that the government makes your interest payments on a subsidized student loan while you’re in school.

Personal student loans are more similar to standard personal loans in that they look at your credit to determine approval. In most cases, you must have a good credit score in order to qualify on your own. Otherwise, you must have a co-signer with good credit to obtain the loan. In some cases, personal student loan lenders will consider you for approval when you have a limited credit history.

Unlike federal student loans that allow you to defer your payments until after graduation, personal student loans require you to make payments as soon as you receive the money. Unless you’re able to hold a job while attending college classes, obtaining a personal student loan isn’t a viable option for you.

Although both kinds of student loans require you to stay enrolled in school at least half-time, interest rates vary. The federal student loan locks in a low rate of interest while you attend school and adjusts to a higher rate after graduation. In both cases, your interest rate is still lower than unsecured personal loans. Conversely, a personal student loan carries a variable interest rate, meaning the rate can and does change based on your contract terms. This makes budgeting for your monthly payments difficult, if not impossible.

Personal student loans exist to help students cover college expenses when federal aid is not enough, but always seek federal student loans, grants and scholarships before utilizing this option.

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