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The Truth about Private Education Loans

By Joe Aguilar

According to the Council of Graduate Schools, the average cost of graduate school has skyrocketed by 60 percent within the last decade. This huge university price hike has helped private student loans become the fastest-growing source of college financial aid. In 2005-2006, for example, college students borrowed $17.3 billion dollars in private loans. If you're thinking about taking out private loans to help pay for your on-campus or online master's degree, you need to understand the facts.

Would I Qualify for a Private Loan?

To be eligible for private loans, you should first meet the following requirements:

  • Have an official Social Security number
  • Have no defaults on any prior student loans
  • Have a clean credit record
  • Be a U.S. citizen or permanent resident status
  • Have a co-borrower if you are a foreign-born student

So how do private loans differ from federal loans? First, federal loans are awarded based on your financial need as determined by information you submit on the Free Application for Federal Student Aid (FAFSA), while private loans are granted based on your credit record. Although private loans offer certain advantages, you should also be aware of potential risks.

Benefits of Private Loans

  • You don't have to prove your financial need to obtain private loans
  • May have lower rates than standard loans
  • Fast approval and quick disbursement of funds
  • Possibility of rate reductions for on-time payments

Downsides of Private Loans

  • Interest rates are not standardized and can swing dramatically
  • Do not qualify for federal consolidation
  • Potentially misleading marketing campaigns
  • Generally do not offer loan deferment options

Because private loans carry interest rates that can change over time, make sure to exhaust all your federal funding before applying for private loans. Recent changes to federal rules allow federal financial aid for students of online degree programs. Also, you may find other ways to pay for your master's degree, such as school-based work-study programs, federal grants, university teaching assistantships, private scholarships, and a part-time job.

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