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Private student loans

Private Student Loans: a critical analysis.

The trend seems to be changing as more and more numbers of students are picking up private student loans in spite of being aware of the fact that this will only get them deeper into debt. While some students choose private student loans as an alternative to Federal aid, there is a wiser lot which uses private loans only to bridge the gap between the educational cost and the Federal aid.

The cost of education has increased by more than 40 percent over the last twelve years but sadly the Federal loan limits have not increased at all over the last ten years. This is one reason that the private educational loans have seen an increase of nearly 45 percent in case of undergraduates and more than 50 percent in case of graduates in the last four to five years. The total amount of borrowings by students from private lenders has increased five times since 1994 and is currently around $45 billion.

The total amount of money taken up by students as private student loans is much above the total amount of funds granted under the Federal student educational programs. While the amount of money taken up as private student loans has increased but the number of students preferring such loans is not very high. Private student loans are rarely used by undergraduates and are normally used by graduate and professional students. There are fewer students who are taking up private student loans but the average amount of loan that they generally take is very high.

It is quite likely that if the limits of Federal educational loans are increased a major portion of the student population currently using private student loans will easily shift on to using Federal loan options only.

One of the major drawbacks of private student loans is that as soon as the loan gets disbursed, interest starts accumulating on the monthly payments and this goes on till the time the student is in school. By the time the student finishes school his loan amount would have grown out of proportion because of this.

Private student loans are quite often advocated by financial aid experts as being a more

logical alternative to Federal student aid to continue with higher education. Indeed, private school student loans are a good way to cover up the gap between the Federal aid and the total cost of education. However, using private student loans to substitute for Federal aid is in no way beneficial and as opposed to what the financial aid experts say the private student loans should only be used to supplement the Federal aid.

Private student loans do have their own advantages such as

1. Bigger amount of loans can be approved within a few minutes,

2. There are no deadlines for submission of application,

3. These loans are not based on needs rather on the credit taking ability of the borrower.

Private student loans can be picked up any time during the education that is when you are enrolling for the course or even when you are already halfway through the course.

The financial aid experts often lay out a lot of benefits of taking private student loans; let us take a look at some of these claims and the actual truth.

Private student loans come with fixed rates of interest is one of the claims made to persuade the borrowers, however this is not very true because the interest rates for private student loans are fixed at prime rates. And prime rates keep on fluctuating on a quarterly basis based on London Interbank offered rates; apart from this a margin is imposed by the lender. Another claim is that private student loans have more flexibility in terms of the payment options and thus come out as a more affordable solution as compared to Federal student loans. There is some amount of flexibility regarding the time within which repayment must begin; but what they dont tell you, is that the repayment term for a private loan is capped at fifteen years which is nearly half of the repayment time which is allowed for Federal student loans. And if you believe that this really is not significant consider the fact that by getting your Federal loan term extended through consolidation the monthly payments can be brought down by up to 50 percent.

When a student chooses a private student loan instead of the Federal student loan he also has to forgo some of the very vital benefits which are associated only with Federal loans. For instance under the Federal student loan program there is a provision under which if a student becomes disabled or dies, the amount gets forgiven and no repayment is required. However, with a private student loan there is no such relaxation and whatever may happen the repayments will have to be made under all circumstances.

Complete loan forgiveness is only provided under the Federal student loan programs in cases such as disablement and unemployment when the payment may actually be unaffordable for the borrower. This benefit is completely lost when opting for a private student loan, as the liability to pay back the debt never ceases.

So, while the private student loans advocates may make high claims it is still better to use private student loans only to fill up the gap between the financial aid and the total expenses related to education. That boils down to a simple fact that private student loans can only be used to supplement Federal aid and never to substitute Federal aid.

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