Bank Student Loans: What You Need To Know

What you need to know about bank student loans is that responsible borrowing from a bank through government-backed or private loans can be a key tool in paying for undergraduate or graduate schooling.

2 Kinds of Bank Student Loans

When borrowing from a bank for a student loan, there are two general types of loans available to you, federally-backed loans and private loans. Each has special characteristics and uses.

  1. Federally-Backed Loans - A variety of federal government organizations offer federally-backed loans through your local bank. There are loan programs available to qualifying students and to parents of eligible students. When the loans are subsidized by the government, they often offer below-market interest rates.

    They also can feature special terms not available in conventional loans including need-based payment deferment and easier qualifying standards. Lenders often have greater flexibility to offer a bank student loan even if you have a less-than-desirable credit history.

  2. Private Bank Loans - These loans are not backed by the federal government and are unsubsidized by the government. In other words, they are conventional loans akin to a car or home loan. You will be subject to standard credit evaluation and likely will be offered market interest rates.

    However, private bank student loans can still be an important part of your school financing package. Private bank student loans should be used to cover that portion of your educational expense that is not covered by dollars you've saved, grants or scholarships received, and government-backed loans.

Choosing a Lender

Whether you have a good credit history or a bad one, there are always options for bank student loans.

If you have a good credit history, many lenders will compete for your business. So it will pay you to shop around for the most competitive interest rates and terms. If you have a bad credit history, you very likely will pay a higher interest rate, but don't be discouraged.

First, there are still many lenders interested in your business. Second, if your credit score improves over the course of your education, you can consider refinancing your loan at a lower rate and for lower payments.

Managing Your Loan

Bank student loans are one tool in your tool kit to pay for higher eduction. Be certain that you have selected the best tool and that you use it well.

In applying for bank student loans, be completely honest with your lender. When a bank is offering a student loan, they will want documentation of your income and likely expenses. They will want the same information if someone is co-signing with you. Primarily, those offering bank student loans are interested in not over-burdening you with debt.

If offered a bank student loan, be certain that you understand the terms and conditions. Are there fees owed the bank for originating the loan? Is there a penalty if you pay it off early? 

What happens if you miss a payment, or if your financial situation changes? Your lender will gladly answer all your questions, but be certain to read the documents you or your parents are signing.

Finally, be honest with yourself as well as your lender. Payments on student bank loans must be manageable whether they are due currently or deferred until after you complete your education. The money you are borrowing through bank student loans must make sense in the context of the education you are receiving and the income you are likely to generate after school.

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