Private student loans typically have variable interest rates, less flexible repayment options than federal loans and require a credit check and maybe even a cosigner. Generally, private student loans end up costing more than federal student loans, so it’s usually a good idea to look into federal loans before taking out private ones. Federal Direct loans can fall short of covering an MBA program from a top B-school. Graduate PLUS Loans or private loans can make up the difference, and as long as you’re careful not to borrow extravagantly, an MBA should more than equip you to pay off your loans.
To browse some of the private loans that are available, look at this list.
Credit Checks and Co-Signers
A good way to begin the application process for a private loan is to get a copy of your credit report and review it for errors. With good credit and/or a co-signer, it is possible (although not terribly common) to get lower interest rates on private loans than federal loans. However, because private loans generally have variable interest rates, you still risk paying more for the private loan in the long run. Even if you have good credit, a co-signer can sometimes help you to obtain a lower interest rate.
How to Compare Interest Rates
Interest rates for private students loans are expressed in relation to an index, either LIBOR or PRIME. Loans with a LIBOR index generally end up costing less than loans with a PRIME index, although this is not always true. At the time of this writing (2011), an interest rate of LIBOR + 2.80% is equal to an interest rate of PRIME +0.00%, and this differential is gradually increasing. Borrowers should also be wary of fees, as 3-4% fees end up costing about as much as 1% interest over time. Typically, the best private student loans have interests rates of LIBOR + 2% or PRIME – 0.50% with no fees. Learn more about interest rates here
Building a Debt Portfolio
Because business school is an investment, it’s wise to think of your student loan debt as a portfolio that you can manage strategically. You should avoid building an extravagant portfolio, but holding a mixture of federal and private loans does allow you some agency in how you manage your debt. When interest rates are low (as they are now) you can reduce debt most quickly by paying off your fixed-rate federal loans. When interest rates climb (as they likely will during a period of economic recovery) you should pay off your variable rate private loans.
Finding the Right Loans for You
Determining if private student loans are right for you and finding the right loans are complicated processes that require careful research and evaluation. While many resources are available, the decision should ultimately depend on your personal finances and educational needs. If you need more guidance, consider speaking to a financial advisor. The Financial Aid Department at your school should also be able to point you in the direction of useful resources and provide counseling.