Major Considerations

Some of the major considerations involved in choosing a lender include cost, flexibility and customer service.   You should also inquire about the following:

APR:  The Annual Percentage Rate (APR) is the yearly cost to you of borrowing your loan, shown as a percent of the amount you borrowed.  APR calculation takes into account all fees and capitalized interest as well as the loan amount, so will usually be higher than the stated interest rate.  If a lender indicates their APR is lower than another ask what factors were considered in calculating the APR they have presented to you.  Have they taken into consideration borrower benefits you are unlikely to get?

Interest capitalization – Interest is typically capitalized (added to the loan’s principal balance) quarterly, annually, or at repayment depending on the private loan program.

Enrollment:  There are few programs available to students enrolled less than half-time.

Grace Period:   Many programs allow payments to be post-poned for six months after graduation, withdrawal, or if enrollment drops below halftime.

Deferment and Forbearance:  Many programs allow payments to be postponed while the borrower is enrolled at least halftime (some programs allow less than half-time enrollment.)    However, private loan lenders are NOT required to offer deferments or forbearances.

Repayment Term:  Repayment terms vary from 4 to 25 years based on the program and loan amount borrowed.  Many lenders offer both a standard or graduated repayment schedule.

Cosigner:  Many programs require a cosigner when borrowers don’t meet debt-to-income and/or credit requirements.  Many lenders require a cosigner for freshman and sophomore students.  A cosigner may also help the borrower qualify for better loan terms.

Loan Discharge and Forgiveness:  Most lenders do not discharge loan balances for any reason.

Fees:  Fees vary.  Some offer zero fees but have higher interest rates, while others have fees that are generally based on your credit history, ranging from 1% to 10%.

In addition, ask the lender if the interest rate is based on the LIBOR or Prime rate?

 LIBOR stands for London Interbank Offered rate.  It’s the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.  It is a standard financial index used in US capital markets and can be found in the Wall Street Journal.  In general, its changes have been smaller than changes in the prime rate.  It’s an index that is used to set the cost of various variable-rate loans.

The Prime rate is a common benchmark for consumer and business loans set by banks, usually at a level 3 percentage points higher than the Federal Funds rate.  The rate given to consumers on their loans is often determined as the prime rate plus a certain percentage, which represents the lender’s assessment of the risk in lending