Private College Loan Perils

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Ask intelligent questions. Before committing to a private loan, ask these questions:

• Can I get a fixed-rate loan?
• If the interest rate is variable, is there a cap on how high it can go?
• What percentage of borrowers gets the best rate?
• Do you offer an interest rate discount or a reduction in principal if I make on-time payments?
• Does the discount kick in when I start paying off my loan?
• If the discount isn't immediate, how many months of on-time payments must I make?
• If I miss a payment, is there anyway to recapture the discount?
• Are your discounts guaranteed or could they disappear later?
• If I encounter financial hardship, will you allow me to stop payments temporarily without financially penalizing me?
• Is there a prepayment penalty?
• What index are your loans tied to?

Check your credit. If you're contemplating applying for a private loan, check your credit report. By federal law, you are entitled to a free credit report annually from each of the three major credit bureaus:

Equifax (800) 685-1111, www.equifax.com
Experian (888) 397-3742, www.experian.com
TransUnion (800) 888-4213, www.transunion.com

If something is wrong, you'll want to correct it.

Unfortunately, what the free reports can't tell you is your credit score. FICO, which is an abbreviation for its creator, Fair Isaac Corporation, is the most common credit score. FICO scores range from 300 (abysmal) to 850 (phenomenal). Financial institutions generally require minimum scores of 700 to 720 to qualify for the best loan interest rates and terms. About 58% of Americans recently managed to have a FICO score that was at least 700.

If your FICO score is less than 620 to 650, you will generally not qualify for private student loans. Most lenders have five or six credit tiers from 650 to 850 so a 30- to 40-point change in a credit score can have a big impact on the cost of a loan.

If your credit score isn't great, you should definitely try boosting it. Taking this initiative could ultimately save you thousands of dollars if you qualify for a more attractive private loan. You can discover many ways to do just that by reading an excellent book, Your Credit Score: How to Fix, Improve, and Protect the 3-Digit Number that Shapes Your Financial Future, 2nd edition, by Liz Pulliam Weston.

Make timely payments. You never want to court trouble with a lender whether it's a private institution or the federal government. One of the best ways to avoid punitive penalties for missing payments is to sign up for automatic payments through your checking or savings account. Many people mess up when they change residences and fail to receive their bill. Don't expect lenders to be sympathetic.