10 Questions to ask before borrowing a private student loan for college
Answer These Before Taking on Private Student Debt
Private student loans may tempt families looking to pay for college when federal and institutional aid fall short. But not all debt is created equal, and private student loans tend to carry stricter repayment terms and fewer safety nets than federal debt.
Experts weighed in on the student loan questions students – and their parents – should ask before taking on private debt. Answers have been edited for length and clarity.
1. Do I really need the private student loan?
"If you determine that the financial aid you are receiving is not sufficient to cover your direct costs, schedule an appointment with the financial aid office and ask what other options are available. Maybe there is additional funding that may alleviate the possibility of taking out a private student loan," Terry Finney, director of financial aid and scholarships at Arkansas State University, told U.S. News.
She suggests asking whether the school has a fund that it uses in situations like this, its own low-interest loans or on-campus jobs.
2. How is my credit rating?
"Your credit rating will help determine the interest rate you will be offered via a private alternative student loan," Clara Capron, assistant vice president for enrollment and student services at Western Washington University, told U.S. News.
3. What happens if my parents cosign for the loan, and I default later on?
"Sometimes parents are under the impression that all loans in the financial aid package are loans that the student is responsible for and are shocked later when they realize that they are solely or equally responsible for the loans," Wan McCormick, financial planner at Reliable Alliance Financial, told U.S. News.
"Once parents cosign for the loan or sign for the parent loan, it becomes their legal responsibility."
4. Which would you rather be: a starving college student or a starving adult?
"Know what your total payment is going to be every month after graduation. It's easy to borrow the money and say, 'I'll pay it back once I graduate.' But once you graduate, you want a house and car and family. It's tough to pay $600 to $800 in loan payments when that could be your mortgage or car payment," Jill Rayner, director of financial aid at University of North Georgia, told U.S. News.
One resource to predict future payments: a loan repayment calculator.
5. Who – the student or parent – will repay the loan and how will it be repaid?
"Both the student and parent should understand the terms of the loan. And if a student is going to repay the loan, they should take that into consideration when considering starting salaries and post-college budgeting. If parents are to repay the loan, they should likewise budget accordingly and become familiar with the terms of the loan so they understand the various circumstances under which repayment will begin," Leah Stewart, director of student financial assistance at Northern Kentucky University, told U.S. News.
6. What is the interest rate – and is it fixed or variable?
"As with any type of loan, the amount of interest paid over the life of the loan will increase the amount owed and your monthly payments."
"It is also important that you take into consideration whether the interest rate is fixed or variable – and how much the rate may rise over time. This can increase the overall amount repaid on the loan," Traci Armes, director of financial aid at Indiana University Southeast, told U.S. News.
7. At what point will interest capitalize?
"Capitalization is the accumulated interest added to the principal of the loan. It's very much like building a snowball – a little bit on top, a little more on top – and it slowly starts to become a heavy weight. Especially when borrowing for that first year, the capitalization can create a situation where a student leaves and is actually is surprised by the amount of debt that they've accrued," Gail Holt, dean of financial aid at Amherst College, told U.S. News.
8. What kind of repayment options are made available to borrowers?
"Students need to see if a lender will allow for any kind of slack in difficult financial situations during repayment. The last thing students who may be in a tight spot want to hear is that they either cannot place loan payments into a deferment or forbearance for temporary relief. If the lender does allow for deferment or forbearance, be sure to see if there are consequences, like increases to the interest rate," Rachel Myers, communications coordinator at the financial aid office at Liberty University, told U.S. News.
9. What is the accrued interest amount while I am in college?
"Many private student loans accrue interest while the student attends four – or five or six – years of college. This, coupled with an origination fee, can greatly add to the cost of the loan. Here's one example I use to demonstrate the amount of interest over the life of the loan: A $14,000 loan that has interest capitalized until payments start. In this case, the borrower will have $6,273.53 in interest added to the original $14,000 loan, now having a new balance of $20,273.65 when payments start," says Curt Martin, financial aid director at Colorado Mesa University.
10. What are the repayment options while I am in school?
"Private loans are not subsidized, so you are responsible for interest that accrues at all times, including while you are in school. While some lenders may allow you to defer principal and interest payments while you are in school, you will want to pay at least the amount of interest that accrues each month."
"You should also know when and how often unpaid interest is capitalized, which is when it's added to the loan balance," says Marty Habrock, director of financial support and scholarships at University of Nebraska—Omaha.
Find Other Ways to Pay for College
Private student loans are just one way to finance a college education.
Copyright 2015 U.S. News & World Report
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