Tackling Your Tuition Bill: Private Student Loans

September 11, 2012 | posted by College Money Insider.

It’s that time of year when tuition bills will be showing up in mailboxes across the country! To ensure you are covered, here are some things that students and parents may want to consider.

Today is the second of three guest posts by Overture Technologies’ Ben Carey. You can check out his first post about the FAFSA right here.

Private student loans can be a cost-effective option!

C’mon, let’s face it.  The FAFSA may not fulfill all of your needs. According to a Federal Reserve study conducted back in 2009 (and perhaps holding true today), suggested reasons for not filling out the FAFSA and going straight to a private student loan for college funding include, but are not limited to:

  1. The private loan option is easier and less time-consuming.
  2. Generally, the combination of gift aid, work study, AND federal loans do not cover the full cost of education, thus leaving a need to find a funding option to fill the “gap”!
  3. Privacy issues of sharing so much personal/financial information with the government seems off-putting to many.
  4. Many parents feel they “make too much money” to be considered for any type of federal options, so why even fill the FAFSA out??!  (Big mistake!!)

Whether or not these reasons apply to you, it is true that private student loans can provide a cost-effective option to students and parents. Private student loans are administered by commercial lenders and have two rate options: fixed and variable.  First, the fixed rate….Like the name suggests, the rate is fixed throughout the life of the loan (like the Parent/Grad PLUS). The “rap” on fixed rate private student loans seems to be that only the “best-of-the-best” credit eligible borrowers will ever qualify for the lowest advertised rate. BUT, (there’s always a BUT)…what if you “were” one of the qualified few who earned the right to breath the rarified air of the lowest rates offered?  Why should you have to pay the “one-size-fits-all” rate that applies to federal loans? Why should you have to pay the same as someone who may not have been as diligent with their credit as you? Bottom line: Fixed private student loan rates are like a well-tailored suit.  They fit the exact specifications of your qualifications.  And yes, there are fixed private student loan rates that are far below the federal PLUS rate of 7.9%! One-size-fits-all is NOT a private student loan offering!

Of course, in addition to fixed private student loan rates, there are variable interest rate options.  With variable rates, the rates will fluctuate.  These rates have a base “index” with a “spread” based on your credit/FICO and other factors. The “index”, or base rate, is calculated in three ways: Prime Rate, which has been on a steady trend of 3.25% for the past three years, the 1-month LIBOR (London InterBank Offered Rate), and the 3-month LIBOR (see FedPrimeRate.com for current Prime and LIBOR rates). Like the fixed rate private student loan, why pay for a one-size-fits-all rate if you qualify for the BEST rates offered?

Whether you are shopping for a fixed or variable rate private loan, you should make sure to do some comparison shopping to find the best rates!

Ben Carey is currently the Vice President of Sales at Overture Technologies.  He is a 23-year veteran of the student lending industry with extensive experience working with colleges and universities.  Ben served in both sales and sales leadership roles helping schools and families make informed decisions about the best ways to finance higher education.

Image: imagerymajestic