As financial aid packages roll in, students and parents may start wondering whether a private student loan could help them pay for college.
We had experts weigh in on the questions students — and their parents — should ask before taking on private debt.
“Ask, ‘Have I exhausted my options with the institution?'” says Scott Juedes, director of student financial services at Wellesley College. “There are federal loans, institutional loan programs and state loan options as well.”
After that important first question, experts offered up a range of follow-ups. They cover everything from understanding the terms of the loan to making contingency plans for unemployment or default.
Answers have been edited for length and clarity.
[Discover the seven questions that parents should ask financial aid officers.]
Terry Finney, director of financial aid and scholarships, Arkansas State University
Do I really need the private student loan? If you determine that the financial aid you are receiving is not sufficient to cover your direct costs, schedule an appointment with the financial aid office and ask what other options are available. Maybe there is additional funding that may alleviate the possibility of taking out a private student loan. There may be opportunities to work on campus. The institution may have a fund that it uses in situations, such as this, to bridge a gap. The institution may also offer low-interest loans on its own.
Clara Capron, assistant vice president for enrollment and student services, Western Washington University
How is my credit rating? Your credit rating will help determine the interest rate you will be offered via a private alternative student loan.
Wan McCormick, financial planner at Reliable Alliance Financial
What happens if I cosign for the loan, and my kid defaults later on? Sometimes parents are under the impression that all loans in the financial aid package are loans that the student is responsible for and are shocked later when they realize that they are solely or equally responsible for the loans. Once parents cosign for the loan or sign for the parent loan, it becomes their legal responsibility.
[Understand the consequences of student loan default.]
Jill Rayner, director of financial aid, University of North Georgia
Which would you rather be: A starving college student or a starving adult? If you do take out this private loan and already are taking out federal loans, know what your total payment is going to be every month after graduation. It’s easy to borrow the money and say, “I’ll pay it back once I graduate.” But once you graduate, you want a house and car and family. It’s tough to pay $600 to $800 in loan payments when that could be your mortgage or car payment. Use a loan repayment calculator, based on what you’ve borrowed so far, to get a reality check.
Leah Stewart, director of student financial assistance, Northern Kentucky University
Who — the student or parent — will repay the loan and how will it be repaid? It is important to set expectations at the beginning of the process to ensure the student and parents are on the same page. Both should understand the terms of the loan. And if a student is going to repay the loan, they should take that into consideration when considering starting salaries and post college budgeting. If parents are to repay the loan, they should likewise budget accordingly and become familiar with the terms of the loan so they understand the various circumstances under which repayment will begin.
[Read about repayment options and restrictions for private student loans.]
Traci Armes, director of financial aid, Indiana University Southeast
What is the interest rate — and is it fixed or variable? As with any type of loan, the amount of interest paid over the life of the loan will increase the amount owed and your monthly payments. It is also important that you take into consideration whether the interest rate is fixed or variable — and how much the rate may rise over time. This can increase the overall amount repaid on the loan.
Gail Holt, dean of financial aid, Amherst College
At what point will interest capitalize? Capitalization is the accumulated interest added to the principal of the loan. It’s very much like building a snowball — a little bit on top, a little more on top — and it slowly starts to become a heavy weight. Especially when borrowing for that first year, the capitalization can create a situation where a student leaves and is actually is surprised by the amount of debt that they’ve accrued.
Rachel Myers, communications coordinator at the financial aid office, Liberty University
What kind of repayment options are made available to borrowers? Students need to see if a lender will allow for any kind of slack in difficult financial situations during repayment. The last thing students who may be in a tight spot want to hear is that they either cannot place loan payments into a deferment or forbearance for temporary relief. If the lender does allow for deferment or forbearance, be sure to see if there are consequences, like increases to the interest rate.
Trying to fund your education? Get tips and more in the U.S. News Paying for College center.
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8 Questions to Ask Before Borrowing a Private Student Loan originally appeared on usnews.com
