Private Student Loans Gaining Popularity but Students Urged to Maximize Federal Financial Aid First

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Student Assistance Foundation clears the confusion about choices: GradPLUS vs. private college loans

According to a recent report released by the Institute for Higher Education Policy and several other studies filed in 2006, private loans are increasingly popular, used alone or in conjunction with federal student loans, and are likely to continue as a big part of the student financial aid landscape. However, many students are reaching for private student loans before maximizing federal student loan options. Student Assistance Foundation, a nonprofit provider of student loans nationwide, offers sound advice in choosing the right loan based on individual needs.

Graduate PLUS loans are the newest addition to federal financial aid options this year. The regular Parent PLUS loan has been a useful choice among undergraduates, but the new Graduate PLUS loan is specifically for graduate and professional students. Grad PLUS loans have a 10-year term which can be extended to 25 years depending upon the loan amount. They also have a 3 percent origination fee and a fixed interest rate never to exceed 8.25 percent. Most lenders will offer Graduate PLUS loans with benefits that will offset the origination fee paid by the student and lower the overall rate by as much as 1.25 percent. With these benefits, the Grad PLUS loan is a very attractive way for graduate students to fund their education costs.

With a Graduate PLUS loan, students may borrow up to the full cost of their education, less other financial aid received including Federal Stafford loans. Graduate PLUS loans can help cover the cost of tuition, books, school supplies and living expenses. Grad PLUS loans may be a good option for students planning to pay off student aid over a long period of time, as the interest rate will never change.

Private college loans are an additional source of funding to help bridge any remaining financial gap not filled by federal financial aid. Private student loans generally have a variable interest rate indexed to the Prime Rate or three-month Libor plus a markup without any cap on the interest rate. In today's interest rate environment, a Prime Rate loan may vary from 7.70 percent to 17.85 percent, while a Libor based loan may vary from 8.46 percent to 12.85 percent! In addition, students can expect to pay origination fees on private college loans ranging from 0 percent to 10 percent of the initial loan amount. As one can see, this type of loan can be very expensive.

Borrower benefits are also offered by lenders on private student loans providing the borrowers an interest rate reduction ranging from .25 percent to 1 percent. Private loan programs generally offer borrowers higher loan limits which can be helpful, provided that the student exercises responsibility and restraint to avoid over-borrowing.

Payment for private student loans usually begins after graduation following grace periods that can run as long as 12 months. While convenient for the borrower, graduate students must realize that their loan balance will continue to increase substantially from the initial amount borrowed through this grace period.

Since private loan interest rates and fees are dependent upon the borrower's credit score, to get the best pricing, it is highly advisable for students without good credit history or with a credit history that is not established, to obtain a creditworthy co-borrower. Many lenders will release the co-borrower from the credit obligation following 24 to 48 months of on-time payments.

Since the interest rate resets frequently on private student loans, students would be wise to use this type of loan program primarily when overall interest rates in the economy are on a decline and loans are expected to be paid off in a short period of time.

For more information about making smart college loan choices contact Student Assistance Foundation at (800) 852-2761 ext. 9750 or visit

About Student Assistant Foundation

Student Assistance Foundation is a Montana-based, nonprofit organization that provides students and families nationwide with the knowledge and tools to finance and pursue post-secondary education. Student Assistance Foundation offers a wide range of programs including grants, community outreach, student loan consolidation, counseling and training on education finance planning.


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Jeannie Huntley
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