Due Diligence: Tips to Find the Best Private Student Loan

Finding the best private student loan doesn't need to be difficult, but it does require some investigation. A private student loan is one that is loaned by a private institution and can be used for any college related expenses, not just tuition. This type of loan is best used when all other options for college expenses are exhausted, as the rates are typically higher.

There are some basic rules of thumb to follow when shopping around for the best loan.

  • The school's financial aid office may refer to preferred lenders. Some may even offer the school a set amount of money to lend at preferred terms in exchange for being on the school's list.
  • Find out who has the best borrower benefits. Some lenders will reduce interest rates or allow principal refunds if the loan is paid on time. Another benefit is a rate reduction if automatic payment withdrawals are used. If the borrower pays on time for a set amount of months, many times the lender will reduce their rate.
  • Understand interest capitalization. Ask how often the accrued interest is added to the private student loan principal. Some will capitalize the interest annually, some once a quarter and some once repayment begins. The more interest capitalized, the more it compounds.
  • Use a Co-Signer. A parent or other authorized co-signer with a higher credit rating may allow for the borrower to qualify for a better rate.

Shopping around for the best private student loan is important because they can vary so much between institutions. By performing due diligence, the borrower can make smarter choices.

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