Make an investment in your future
Borrow responsibly. Make sure you understand how a private education loan works, and how it fits into your plan to pay for college.
A private education loan is:
- Borrowed money to pay for higher education
- Generally offered to students by financial institutions, such as banks or credit unions
- Available based on a good credit rating, or with a creditworthy cosigner
Consider a private education loan when you've explored the following options but have remaining costs:
- Financial aid offered by your school
- Federal student loans offered through the Department of Education
- Money from your personal savings
TIP: Make sure you consider the full cost of college — not only tuition and fees, but also housing, meals, books, personal expenses, and even transportation. That way, you won't have to scramble to pay for unplanned expenses at the last minute.
One of your first questions might be, "How much should I borrow?" In short, borrow only what you will need and, even more important, only what you’ll be able to repay.
Figuring out how much to borrow:
- Use an online calculator — such as Sallie Mae's Education Investment Planner® — to determine your expected monthly payments.
- As you plan, remember that you'll have other financial obligations after graduation, such as rent or mortgage, utility bills, and transportation.
- Research your future earnings potential in your chosen field. (The U.S. Department of Labor lists salary estimates by occupation at www.bls.gov/oco/.)
- Use these two popular methods to determine how much to borrow:
a. Monthly income percentage: Your monthly payment should be no more than 10% of your pre-tax monthly income.
b. Starting salary: The total amount borrowed shouldn't be more than your expected annual starting salary.
When you're evaluating private education loans, consider the total loan cost. Interest rates, fees, and loan repayment schedules are primary factors.
Interest rates: Some lenders offer loans with both variable and fixed interest rates.
|Same interest rate for the life of the loan
||Rates depend on economy, and can rise or fall
|Often higher rates than variablerate loans
||Often lower beginning rate than fixed rate loan
|Set monthly repayment amounts
||Monthly payment amounts change when the interest rate changes
Fees: Lenders sometimes add additional fees to the total loan amount, usually called an "Origination" or "Disbursement" fee.
Repayment options: The way you choose to repay the loan will impact the total amount you will pay. Evaluate whether you would prefer to begin repayment while in school or to defer until after graduation.
|When repayments are made:
||When repayments are made:
|While in school
||- Choosing to pay interest while in
school will allow you to graduate owing
the same amount you borrowed. Even
making small payments during school
will help reduce your total cost.
||- Paying later offers flexibility while in
- Interest grows and is added to the
|Length of repayment:
|Set monthly repayment amounts
||- Lower monthly repayment
- More interest paid overall
|Shorter term of repayment
||- Higher monthly repayment
- Total cost of loan (including interest)
Example: This shows a $10,000 loan at an 8% interest rate. The APR with deferred payments during school is 7.48% and with interest payments during school, it is 7.99%. This example assumes a student is in school for four years and will have a six-month grace period before principal and interest payments start, with a 10-year repayment term.
||Monthly In-School Payment
||Balance at Repayment (typically six months after graduation)
||Monthly Principal & Interest Payment (10 years)
||Total Amount Paid
TIP: Even small payments will help lower the cost of a loan, so consider looking for a loan that allows flexibility while you are in school.
Here is a list of terms and features to consider when you're choosing a private education loan. Note that they differ from lender to lender.
||What it means
||Payment amounts can vary over the life of the loan
||Set payment amount over the life of the loan
||Make payments while in school
||Lowers overall cost of the loan
|Delay making payments until after graduation
||Flexibility; will increase the total loan cost
|Benefits offered by the lender
||- Enrolling in automatic debit
- Making payments on time
|Provide discounts to your loan, reducing the total
||- Cosigner release (releases cosigner from repayment
responsibility after a certain period of time)
- Death and disability waivers
- Programs for customers in financial distress
|Helpful features can make
repayment easier in difficult
||-Company history/financial stability
-Experience in the education industry
|Make sure you are confident
in the stability of your lender
Now that you have some idea of what to look for when you're choosing a private education loan, it's time to make a decision. Some do's and don'ts:
- DO consult with the school’s financial aid office and review their school lender lists.
- DO consider being a cosigner if the student has a limited or no credit history.
- Not only will you help the student qualify, but they could get a much better rate because of your good credit!
- DO carefully read and review any offers you receive by mail or email.
- DO make sure you compare all facets of your potential loans: repayment options, benefits, features, and the stability of the lender.
- DON'T forget to do your math. Make sure the loan meets the student's needs and that subsequent payments will be practical for him or her to make after graduation.
- DON'T be shy about asking questions! Your school's financial aid office can help explain any points you don't understand.
TIP: Borrow from your 401(k)? Not so fast...
Parents often think about dipping into retirement accounts to cover college expenses. Remember: You can borrow for college, but you can’t borrow for retirement!
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