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Private student loans are a great option for meeting a specific need in your total education financing package. It is important to understand the role private student loans can play, the elements of a good loan and what to look for in a private student loan lender.

Filling an Important Need

With the cost of higher education today, few can simply pay the tuition, fees, and room and board from private funds. All colleges and university offer scholarships and grant, and the U.S. government has an extensive array of federally-backed loan programs, including some subsidized programs allowing you to borrow at below market interest rates.

But what happens when expenses exceed your private funds, grants and government loans? This is where private student loans come in.

Getting the Best Rate

Lenders have less flexibility with interest rates with private school loans. Government-backed loans, often offered through private lending institutions such as banks and credit unions, create reduced risk for the lender. If your credit history has some black marks on it or if your family income might not qualify you for the loan, a federally-backed loan still offers the chance for you to borrow.

With a private student loan, lenders are taking all the risk. They will look more closely at your credit score. It's important to know your credit score before you approach a lender, and you can request a free look from each of the three credit-rating agencies each year. Be sure you know what your lender is seeing.

Bad Credit Isn't the End

If you have a poor credit history and a low credit score, it does not mean you are automatically disqualified from private student loans. With patience, you can improve your credit score over time and so become a more desirable customer for your lender.

Borrowers can get private student loans right away if they are willing to accept a higher interest rate. Of course, this will increase the monthly payment and increase the total amount of interest expense over the life of the loan.

Know the Terms of Your Loan

A loan is a long-term, binding agreement between you and the lender. While some federally-backed loans have provisions for deferring payments in certain situations, private loans do not. You will be expected to repay the loan on time.

Depending on the lender, some loan may have origination fees and can have prepayment penalties. Be sure you know what you're signing before you sign.

Choosing a Lender

With many federally-backed student loans, you are dealing with a government organization, and you can easily research the experience of other borrowers.

With a private student loan, your relationship is with the particular lender. Be sure that lender has a reputation for putting the customer first. Your credit score will be evaluated to determine the lowest interest rate for which you qualify. That doesn't mean the lender will offer you the lowest rate. Reputable lenders build their success by making you the best deal that is still a good deal for them. Don't expect these lenders to lose money on your private school loans. But at the same time, you should expect them to offer the most competitive interest rate they can given your personal circumstances.