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Student loans are a rite of passage for many people pursuing a trade school or higher education. While federal loans are a great option for those who qualify, not all borrowers will receive the total amount they need from their financial aid package. In such cases, a separate application for private student loans may be in order.
Private lenders offer varying loan terms and interest rates for private student loans, and comparing these differences is important to securing the best deal. Borrowers will want to look at factors like eligibility requirements, repayment options, fees, interest rates (whether fixed or variable), and product details, as these are often different from one company to the next. After comparing the options available, applicants can complete an application with the company of their choice, separately from their FAFSA (federal loan application).
Factors to consider when choosing a private student loan
When shopping for private student loans, it’s important to consider more than just interest rates. You’ll also want to carefully review factors such as fees and repayment terms, to ensure that the options available align with your financial needs. Eligibility requirements and the types of loans offered are also key considerations.
There are private student loans tailored for all different types of students so be sure to check that the private lender offers student loans that fit your needs. For instance, does the lender offer financing for the type of degree you’re pursuing? Typical offerings include loans for students in undergraduate, graduate, business, medical, dental and law school. There are even loans designed to fund bar exam preparation.
Some lenders also offer loans for students who attend trade school or community college. It’s important to investigate loans targeting your specific educational goals, as they may come with different interest rates and provide funding designed to accommodate the unique needs of a particular educational path. Repayment terms may also vary.
While reviewing the lender’s products, check the loan limits and the length of the repayment term. Make sure you can borrow the amount you need and that the loan comes with flexible terms.
The interest rate you pay — and whether it’s fixed or variable — impacts how quickly your balance grows and how much you pay overall. Lenders disclose their interest rate ranges, but the exact rate you’re offered depends on your credit score and other financial details.
Some lenders offer prequalification, which allows you to check your interest rate and loan terms without hurting your credit. It’s worth getting a prequalification offer if it’s available so you can calculate the cost of borrowing and compare offers.
Some lenders also offer a choice between fixed and variable rates. A fixed-rate loan may start a bit higher, but it remains constant throughout the loan term. This can help you plan for future payments. Variable rates can change over time, which may increase your loan costs.
Also, look for interest capitalization, which occurs when the lender adds unpaid interest to the principal of your student loan. As a result, the loan balance grows faster.
Fees increase your total borrowing cost, so ask the lender for a copy of the fee schedule and check whether any apply to you. Some private student loan lenders keep fees to a minimum or may base your fees on your creditworthiness. Look for these types of fees:
- Application fee: Some private lenders charge a nonrefundable fee to process your application.
- Origination fee: Origination fees are usually calculated as a percentage of your loan amount and come from the loan proceeds, meaning you won’t get the full loan amount. For instance, with an origination fee of 5 percent on a $10,000 loan, you’d receive $9,500, with the remaining $500 going toward the fee.
- Late fee: The lender may charge a late fee if you miss a monthly payment or submit it late. These are usually calculated as a percentage of the amount due, with a cap on the amount.
However, you won’t have to worry about prepayment penalties on any student loan. Lenders aren’t allowed to charge borrowers a fee when they pay off their student debt early.
Before applying for a private student loan, make sure that you’re likely to qualify to avoid multiple hard checks on your credit. Every lender sets eligibility requirements, but most usually look for:
- Credit history: Your credit score and the information in your credit reports can determine your eligibility for a private student loan and the interest rate you receive. If you’re new to credit or have poor credit, the lender may require a creditworthy co-signer. A co-signer, typically a trusted friend or relative, agrees to make payments if you cannot, so you’re both equally responsible for the debt.
- Income: You’ll also need to show that you have the income to repay the loan or get a co-signer who does. The lender may also calculate your debt-to-income ratio to check how much of your income goes toward monthly debt payments.
- Enrollment status: Lenders will check that you’re attending an accredited school, and some may require you to attend at least half time.
- Citizenship: Private student loans are usually available only to U.S. citizens and permanent residents. International students may qualify for a private student loan if an eligible citizen or resident co-signs the loan.
- Age: You must reach the age of legal adulthood — 18 in most states — before signing a contract for a student loan. If you’re not old enough, then you’ll need to find an eligible co-signer.
Many lenders allow borrowers to choose from a list of repayment plans. These usually include:
- Immediate repayment: Start making payments as soon as the funds are disbursed. This can help you pay down the loan quickly and save on interest if you can afford payments while in school.
- Interest-only repayment: Pay interest while in school to keep your balance from growing too much. After graduation, you’ll make regular principal and interest payments each month.
- Full deferment: Postpone payments while you’re in school and during your separation or grace period. This could be a good option if you can’t work while in school. Once deferment ends, you’ll start making installment payments.
Some lenders also offer forbearance programs, which allow you to pause monthly payments during financial hardship. But you’ll eventually have to make up for the missed payments, and interest will continue to accrue on the balance.
Before applying for the loan, estimate your monthly payments and look at different loan terms. A shorter loan term comes with higher monthly payments, but you’ll pay less interest overall; a longer term comes with lower monthly payments, but you’ll pay more in interest over the life of the loan.
Parent or student as the borrower
Parents who want to help their student pay for college can also obtain private student loans. Many private lenders offer loans tailored specifically for parent applicants who would like to pay some or all education costs on behalf of their student. This can be a helpful option, especially for parents who have good to excellent credit and are likely to qualify for better interest rates than a student applicant who has not had time to build a credit profile.
Even as a parent, however, it’s important to shop around and compare rates, origination fees and loan terms to find the most competitive offer possible. Income, credit score and other requirements will vary from lender to lender.
It can also be a good idea to find out what rates you’d qualify for on a parent loan and then compare that option to your college student’s loan offers. That allows you to determine which borrower can access the most cost-effective loan.
If you’re having trouble choosing the best lender, look to the fine print for more details. Some features or benefits could lower the costs of borrowing or make repayment easier:
- Autopay discount: You might qualify for a discount on your annual percentage rate if you sign up for automatic payments. This usually takes effect once you start making full principal and interest payments.
- Other savings opportunities: Some lenders provide other ways to earn money or save on the cost of borrowing. For example, they may provide discounts if you have another financial product with them, provide a cash reward if you refer a friend or reduce your principal amount once you graduate.
Look into any details that make the lender stand out over its competition, such as:
- Reviews: Check lender reviews online to see how they rank. Lender reviews can alert you to any issues with the lender, like difficulties processing payments or slow service representative communication. Check out how the lender rates with the Better Business Bureau or our student loan review page.
- Hardship programs: Check whether the lender offers deferment and forbearance programs, which allow you to postpone or pause your loan payments. These programs can help if you’re financially struggling or need a break from payments. Read the details to see when these programs apply and if interest will accrue while you’re enrolled.
- Discharge options: Sometimes, student loan debt passes on to the borrower’s estate after they die. Some lenders will discharge your student loan debt if you become permanently disabled or pass away.
Co-signers are a fairly common feature of private student loans. If you have poor credit, one may be required to prove that you or the co-signer can make payments. Co-signers must have good credit, and since student loans are often taken out by younger people who have not had time to build credit, co-signers are usually creditworthy adults.
Check to see if the loan has a co-signer release. Your lender may remove your co-signer from the student loan debt after you make a series of on-time payments. Most lenders require you to make on-time payments for at least 12 months before qualifying for release.
Also, check the loan’s discharge policies about co-signers. Some private lenders offer discharge in the event of a primary borrower’s death, meaning the co-signer is also released from the loan if the main borrower dies. If you got the loan after Nov. 20, 2018, it’s federal law for the co-signer on a private loan to be released if the main borrower dies. Check what happens when a co-signer dies, as that could leave the main borrower on the hook for the loan balance alone.
How do I apply for a private student loan?
Once you’ve chosen a lender, you’ll fill out an application for a private student loan. Here’s a breakdown of the steps you might take:
1. Time your applications. You can limit the impact on your credit scores by submitting your loan applications within a short time frame, usually 14 to 45 days. That’s because credit agencies usually count several applications for the same type of loan as one hard inquiry. It’s also a good idea to apply for a student loan at least two months before tuition is due.
2. Find a co-signer. You might need a co-signer if you have a limited credit history, a low credit score or a low income. A good co-signer might be a trusted relative or friend with the credit history to qualify and the income to handle payments if necessary.
3. Gather your documentation. Before filling out the application, organize your documents to make the process easier. The lender may ask for documentation like recent pay stubs, a W-2, bank account statements, a copy of your latest lease agreement and an academic transcript.
4. Fill out the application. Every lender has a different application, but most ask for permission to check your credit, details about your finances and documentation to support any information. The lender will also want to know details about your income and employment status, how much you’d like to borrow, the school you’re attending and when you expect to graduate.
5. Approval and disbursement. If you apply online, you may receive the lender’s decision within minutes. The process slows down if the lender needs supporting documents or it has questions. Once you’re approved, review the loan terms and loan documents carefully before signing. The lender will then contact your school to verify your details, confirm your cost of attendance and schedule the disbursement. In most cases, funds will go directly to your school to cover tuition and fees, with any remaining funds reimbursed to you.
The bottom line
Private student loans are a solid option for students who don’t qualify for enough federal aid to cover their annual expenses. Choosing the best private loan must be a careful process, as there are many variables to consider.
Borrowers should evaluate the unique fees, repayment terms, and features available through various private lenders. Once they’ve decided on the best options for a loan and understand what repayment will look like, students can apply strategically to limit any negative impact applications will have on their credit score. Applying with a co-borrower or co-signer may also help boost the chances of being approved.
Ultimately, while federal loans offer more consistent interest rates and flexible repayment terms, private loans can help to cover costs after other options have been exhausted.
Frequently asked questions
While private loans may be funded as quickly as within a few weeks after application, some approval and disbursement processes can take up to two or three months.
Yes, it is possible to get more than one student loan at a time. Be mindful that federal loans include certain borrowing limits. Private loans do not include such maximums, but your eligibility to qualify may depend on your creditworthiness.
You can switch private lenders if you refinance your student loan. There are some benefits to refinancing, such as getting a loan contract with more favorable features, accessing better rates or finding terms that work better for you. Check with your lender about when you can refinance, as many have requirements such as being unable to refinance until after you graduate or withdrawing from school.
You’ll want to make federal student loans your first choice between the two. Federal student loans tend to come with more borrower protections, like forbearance or deferment, income-based repayment and even loan forgiveness under certain circumstances. Fill out the FAFSA to find which federal student loans are available to you.
A drawback with federal student loans is they can cap loan amounts, so they may not cover the full cost of your education. For instance, the annual first-year undergraduate loan limit for dependent students is currently $5,500. That is often when people turn to private student loans to make up the difference, which can be used to cover the full cost of education. Sometimes people with good credit may find more favorable interest rates from private lenders, as well.