Whilst federal student loans provide a fixed interest rate, private student loans run with variable interest rates. In order to secure private student loans however, an up-front fee is often required – ergo reducing the provision of money for educational purposes, and rising the cost to the borrower (the student).
This up-front loan fee is also known as an “origination fee”. the actual value of this fee depends wholly on the total amount of the loan. The borrower is given the choice whether to take the origination fee from the loan amount borrowed – and reducing the money available to support the education in the process, or to add the fee to the total end cost of the loan.
Often in order for the borrower to be able to best compare loans with one another, the APR (annual percentage rate) provides the best method of comparison as it is a rate where there is an inclusion of any of these annual fees or charges. However if the loan repayment schedules differ between loans APR becomes less valuable a tool of comparison to the borrower.
Often private loan programs are interwoven with the movements of one or more financial indexes. The better the credit rating of the student applicant and their family, the lower the overhead charge is for the loans tied into financial indexes.
The consequences of a bad credit rating for a student applicant have been known to be as much as 6% higher interest rates, 9% higher loan fees and a much reduced loan limit to those granted to students of a good credit rating.
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