While direct-to-consumer loans generally carry higher interest rates than school-channel loans, they do allow families to get access to funds quicker than the School Channel private college loans. Direct-to-consumer private loans are the fastest growing segment of education finance and under legislative scrutiny due to the lack of school certification. Loan providers range from large education finance companies to specialty companies that focus exclusively on this niche. Private college loans typically have variable interest rates. Consumers should be aware that some private loans require substantial up-front origination fees. These fees raise the real cost to the borrower and reduce the amount of money available for educational purposes. Eligible loan programs generally issue private college loans based on the credit history of the applicant and any applicable cosigner/co-endorser/coborrower. This is in contrast to federal loan programs that deal primarily with need-based criteria, as defined by the EFC and the FAFSA. For many students, this is a great advantage to private loan programs, as their families may have too much income or too many assets to qualify for federal aid but insufficient assets and income to pay for school without assistance.
School Channel and direct-to-consumer are the two types of Private College Loans that are available for prospective private college loan receipients. School-channel loans offer borrowers lower interest rates but generally take longer to process. School channel private loans are approved by the school, which means the school signs off on the borrowing amount, and the funds are disbursed directly to the school. Direct-to-consumer private loans are not certified by the school, which means that schools don't interact with a direct-to-consumer private loan at all. The student simply supplies enrollment verification to the lender, and the loan proceeds are disbursed directly to the student.
Most private college loan programs are tied to one or more financial indexes, such as the the BBA LIBOR rate with an overhead charge. Private loans are based on the credit history of the applicant, so the borrowing costs will vary. Students and families with excellent credit will generally receive lower rates and smaller loan origination fees than those with less than perfect credit. Money paid toward interest is a tax deductible and can lower your overall adjustable gross income.
Private loans often carry an origination fee. Origination fees are a one-time charge based on the amount of the loan. They can be taken out of the total loan amount or be an addition to the total loan amount. Each percentage point on the front-end fee gets paid once, while each percentage point on the interest rate is calculated and paid throughout the life of the loan.
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