How to choose the best private student loan
If you’ve decided to take out a private student loan, the key to finding the best deal comes down to comparing your options. That’s because unlike federal student loans, which offer the same interest rates and terms to all borrowers, private student loans all operate differently. From one company to the next, you might have different options surrounding the interest rate, fees, repayment plans and hardship programs. Every lender also sets its own eligibility requirements and standards for receiving the lowest rates. Here’s how to choose a private student loan.
Factors to consider when choosing a private student loan
When shopping for private student loans, compare these factors with each lender.
You’ll first need to make sure that the private lender offers student loans that fit your needs. For instance, does it 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. Some lenders also design loans for students who attend trade school or community college.
While you’re going over the lender’s products, check the loan limits and the length of the repayment term. You’ll want to make sure that 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 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, which means that you won’t actually get the full amount of the loan. 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 type of 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, you should make sure that you’re likely to qualify. Every lender sets its own eligibility requirements, but they’ll 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 you have poor credit, the lender may require a creditworthy co-signer. Borrowers typically ask a friend, parent or another trusted relative to fill this role. A co-signer agrees to make payments if you’re unable to, 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 debt payments each month.
- 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 — which is 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, as long as 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 enrolled 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 times of 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. This could be a good option if you’re looking to save money and can afford the higher payments.
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. Check for:
- Autopay discount: You might qualify for a 0.25 percent to 0.5 percent discount off 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.
- 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 you otherwise need a break from payments. Read the details to see when these programs apply.
- Discharge options: In some cases, student loan debt passes on to the borrower’s estate after they die. But some lenders will discharge your student loan debt if you become permanently disabled or pass away.
- Co-signer release. Your lender may remove your co-signer from the student loan debt after you make a series of on-time payments.
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:
- Time your applications. You can limit the impact to 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 the student loan at least two months before tuition is due.
- 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 who has the credit history to qualify and the income to handle payments if necessary.
- Gather your documentation. Before filling out the application, organize your documents to make the process easier. The lender may ask for recent pay stubs, a W-2, bank account statements, a copy of your latest lease agreement and more.
- 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.
- 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.
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