Student Loan Consolidation Incentive

A private student loan is a financing option for higher education in the United States that can either supplement or replace federally guaranteed loans such as Stafford loans, Perkins loans and PLUS loans. These are unsecured loans with various options for repayment and may offer forbearance and deferral options.

Interest rates are set by the financial institution that underwrites the loan, typically based on the perceived risk that the borrower may be delinquent or in default of payments of the loan. The underwriting decision is complicated by the fact that students often do not have a credit history that would otherwise indicate creditworthiness. As a result, interest rates may vary considerably across lenders.

Because private student loans are subject to special treatment in the event of a personal bankruptcy, students may not incur a total debt in excess of the cost of attendance, taking into account scholarships, fellowships, federal loans and private loans.

A number of financial institutions offer private student loans, including banks (e.g., Citibank, Chase Bank, and KeyBank) and specialized companies (e.g., Sallie Mae, NextStudent Loans, Think Student Loans and Graduate Leverage). Financial aid offices in universities typically have a preferred vendor list, but borrowers are free to obtain loans wherever they can find the most favorable terms.

Buying factors include:

• Interest rates throughout the life of the loan - lenders may accrue interest at one rate while the student is in school and another after graduation
• Payment options - lenders typically offer loans that are payable immediately, interest-only loans while the student is enrolled, and no-payment loans until graduation
• Incentives - lenders may offer improved or tougher terms based on the student's payment record
• Origination fees - lenders typically charge a fee for originating the loan that is added to the principal of the loan.

The total cost of the loan is usually document in the Truth in Lending statement that is issued when the loan is originated.

References

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