Private college loans are becoming increasingly popular, with student loan debt statistics showing private student loan balances on the rise. In fact, students borrowed $7.8 billion in private student loans in the 2014 to 2015 school year, according to a 2016 report from the Institute for College Access and Success.
Private student loans can provide necessary funding when you have no other options to pay for school, but they can be more expensive than federal loans and have other downsides compared to federal student loans.
If you’re looking into how to apply for private student loans, we’ve compiled a few important facts to help you decide if private college loans are right for you.
Important facts about private student loans
Both parents and students can apply for private student loans. Here are seven key things you need to know before applying.
1. Private student loans provide extra funding for college after maxing out federal loans
Federal college loans, including Subsidized Direct Loans and Unsubsidized Direct Loans, should be your first choice for college funding. There is a maximum limit to federal student aid, but once you’ve hit that maximum limit, it’s time to consider private loans.
Unfortunately, the 2016 report from the Institute for College Access and Success analyzed the most recent year for which data was available and discovered 47 percent of private student loan borrowers borrowed less in federal loans than they could have, instead opting for private loans. These students lost many of the perks and protections that would have been available to them if they’d borrowed more federal funds.
Before applying for any private loans, complete your Free Application for Federal Student Aid (FAFSA) — this guide to filling out your FAFSA can help — and make sure to exhaust federal Direct Loan options first.
If federal aid and other sources of funds such as scholarships and grants do not cover all of your college costs, private loans can pay the difference.
2. Private loans for students are harder to qualify for than federal student loans
Almost anyone can qualify for federal student loans, as long as you meet basic eligibility criteria such as being accepted to an approved program and not being in default on student loans.
Private student loans, however, require you to qualify based on your credit score. Private lenders also look at your debt-to-income ratio, which is the number of monthly debt payments compared with your monthly gross income. If you don’t have enough income, private lenders will not approve a loan.
According to the Consumer Financial Protection Bureau’s 2015 report, 90 percent of private student loan borrowers who did not have a cosigner had their applications rejected. Since many students don’t have much or any income, and because they often lack a credit history, lenders might require students to have a cosigner to qualify for private student loans.
The CFPB also indicates that even if borrowers can qualify independently, applying with a cosigner could potentially result in a lower interest rate.
Because a cosigner may be required, students whose parents or other family members aren’t able or willing to cosign may be closed out of access to private student loans unless they can work, build a credit history, and qualify on their own.
3. Interest rates and loan terms vary among private student loan lenders
When you apply for federal student loans, the interest rate is determined based on loan type. This chart shows current interest rates for federal loans.
|Loan Type||Borrower Type||School Year 2016-17||School Year 2017-18|
|Direct Grad PLUS||Graduate/Professional||6.31%||7.00%|
|Direct Parent PLUS||Parent||6.31%||7.00%|
When you apply for private student loans, there is no standard interest rate. Instead, different private student loan lenders set their rates. The rates individual applicants receive vary depending upon their credit scores, incomes, and credit history. As of June 2016, the Institute for College Access and Success reported rates as high as 13.74%, which is considerably higher than rates on Direct Loans.
Private student loans may also have variable interest rates, rather than fixed rates. With a variable rate loan, the interest rate is usually influenced by LIBOR or Fed interest rates. If interest rates rise, monthly payments and interest costs could go up, making your overall costs higher.
4. Private student loans offer less flexibility in repayment plans
When you obtain college loans from the federal government, you have many different repayment options, including income-driven repayment arrangements, and a standard or graduated repayment schedule. Because you have various options, you can choose the repayment plan that works for you.
Private student loans typically have fewer choices for repayment and do not offer repayment plans based on income. If you can’t find a job after graduation or if your income is low, you’ll still be expected to repay the private loan based on the payment amount agreed to when you borrowed.
5. Private college loans don’t offer loan forgiveness
Students with federal loans can be eligible for public service loan forgiveness if they fulfill specific requirements related to work and payment history. Students on income-driven plans can also have remaining balances on their debt forgiven after 20 to 25 years, depending upon the program — although forgiven debt is taxable as income.
Private loans for students do not provide loan forgiveness options. Even if you work your whole career in public service and have your federal loans discharged, you will still be expected to repay your private loans in full.
6. There are fewer options for financial hardship with private student loans
If you find you’re struggling with payments on your private student loans, you have more limited options than with federal student loans.
Not only are you unable to cap your payments at a percentage of income, as you would be able to do on an income-driven plan with federal loans, but you also cannot put private loans into deferment or forbearance.
7. Private college loans are difficult to discharge in bankruptcy
Although private student loans are not offered or guaranteed by the federal government, they are still treated differently than many other kinds of consumer debt. Like with federal loans, it is very difficult to discharge private student loans in bankruptcy, as Josh Cohen, a Vermont-based attorney told Forbes.
Private college loan cosigners could still be held responsible for repayment even if the student suffered extreme hardship that justified discharge in bankruptcy.
How to apply for private student loans
If you’ve decided to apply for private college loans despite the drawbacks, you’ll need to know how to apply for private student loans. You should shop around for different private student loan lenders and compare:
- Eligibility requirements
- Application fees and origination fees
- Interest rates and available interest rate deductions or discounts, such as a reduced rate for automated payments
- Loan terms, including repayment term and prepayment penalties
- Reviews of the loan servicer
You’ll also need to gather information including details about your income, your tax returns, and information about your financial assets. With this information in hand, you can apply for loans with different banks, credit unions, and other financial institutions.
You can start by looking at our private student loan marketplace to see what types of loans lenders are offering. If you think you’ve found the right loan, apply for the money necessary to cover the costs of your schooling that federal loans won’t pay for.
Need a student loan?Here are our top student loan lenders of 2018!
|1 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
2 Important Disclosures for Discover.
3 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB) or Turnstile Capital Management, LLC (TCM), which are not affiliated entities. Certain restrictions and limitations may apply. Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. All loan products may not be available in certain jurisdictions. Other terms and conditions apply. Ascent is a federally registered trademark of TCM and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for PNC.
PNC Bank is one of the nation’s largest education loan providers. For over 40 years, PNC has been committed to helping students and their families make possible the adventure of college.
6 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2018 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
7 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
8 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
9 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|3.69% – 10.94%1||Undergraduate, Graduate, and Parents||Visit CollegeAve|
|3.82% – 12.82%3||Undergraduate and Graduate||Visit Ascent|
|4.34% – 12.99%2||Undergraduate and Graduate||Visit Discover|
|4.12% – 10.98%*,4||Undergraduate and Graduate||Visit SallieMae|
|5.03% – 11.23%5||Undergraduate and Graduate||Visit PNC|
|3.88% – 12.88%6||Undergraduate and Graduate||Visit SunTrust|
|4.72% – 9.81%7||Undergraduate and Graduate||Visit LendKey|
|3.72% – 9.68%8||Undergraduate, Graduate, and Parents||Visit CommonBond|
|4.04% – 12.01%9||Undergraduate, Graduate, and Parents||Visit Citizens|