What a Private Student Loan Offer Looks Like
One question I commonly receive from many young adults is, “how do I know if the student loans I am applying for are private student loans or federal student loans?”
In this article, we will dissect some parts of a private student loan offer I received from Apple Credit Union via email and the differences from federal student loans. A snapshot of the offer is listed below.
Name of Student Loan Program
Part 1: The offer starts by identifying the organization offering the private student loan and the name of the program. In this case, the credit union has partnered with Sallie Mae, a long time private student loan provider. It also states the name of the loan as the, ‘Smart Option Student Loan‘.
A federal student loan would be offered by U.S. Dept of Education through the Direct Loans program. Federal student loans are labeled as subsidized stafford or unsubsidized stafford loans.
Key Features of Private Student Loan Offer
Part 2: The key features to attract your interest are highlighted in this part. First, you have the flexibility to start repaying the loan you borrow now, while in school or later.
Federal student loan program expects repayment of your loans to start six months from the date you separate (withdraw, graduate or simply stop attending) from college or go below half time in enrollment. Payments would be made on a monthly basis.
What About Interest Rates?
Secondly, the type of interest rate you would be offered is listed as ‘competitive’. It means the rate you receive will be based on current market rates and your credit. Many young adults often do not have sufficient enough credit to evaluate thus posing a risk to lenders, which means that a higher interest rate is often offered.
Additonally, whatever interest rate that is offered will be variable. A variable interest rate means the rate can fluctuate on a monthly, quarterly or annual basis depending on the terms. You will often get a low teaser rate and mostly likely will increase noticeably later.
Federal student loans interest rates are fixed, meaning the rate will not change throughout the life of the loan. The maximum interest rate charged on federal stafford loans is 8.25%. A fixed rate offers better predicatability how much of your monthly payments goes towards interest charges and the actual loan balance.
Cost of Attendance (COA)- What’s That?
The last feature in part 2, explains that you can receive loan to cover your entire cost of attendance (COA). Patrons, if you recall in one of our student loan lessons, COA covers all expenses related to college, not just tuition charges. This is an attractive feature for many students if they are attending an expensive college. Federal student loans may not sufficient to cover all your expenses.
A Note of Caution
Ask yourself if really you really need to attend an expensive college beause there are alternatives. If you do, then lessen how much you borrow by first maxing out the federal loans you are eligible for and/or consider working part time. As we have learned, federal loans are alot more borrower-friendly.
Key Difference Between Private & Federal Student Loans
Part 3: The big difference between a federal student loan and a private student loan is that you never need to get a cosignor to obtain a federal student loan. This is because federal student loans are NOT based on your creditworthiness or employment status. The exception to this is the federal Graduate Plus Loan.
Private student loan providers often review your credit and if it does not meet their standards, you may be asked for someone to cosign on your behalf. This means if you are unable or unwilling to repay your student loans, they will expect the cosigner to pay.
Another key aspect to consider is that, when you apply for a federal student loan, you must complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA. This application is completed online from the Federal Student Aid website which you can access at, fafsa.ed.gov.
Ok, that’s it for now. Hope you found this helpful.
Let me know if you have questions.
Dr. Linda