You’ve done the hard work of applying to college, filling out the Free Application for Federal Student Aid (FAFSA), and scoring as many scholarships as possible. But you still have a chunk of tuition and living expenses left to pay. Private student loans could help cover that gap.
Unfortunately, you might be a bit overwhelmed trying to understand the private student loan process, and rightfully so. As a high school student, this is likely the first time you’re taking out a major loan. And not comprehending the details fully could land you in some financial trouble.
Not to worry though. Here’s everything you need to know about private student loans:
1. Private student loans differ from federal loans
When you received your financial aid package after filling out the FAFSA, you might have been offered subsidized and unsubsidized student loans. These loans are issued by the government and, therefore, are considered federal student loans.
Private student loans, on the other hand, are not offered by the government but rather by private lenders such as College Ave or by banks. This makes the loans different in many ways:
The private lender determines the eligibility, interest rates, and repayment terms for a private student loan, whereas the government sets those rules for a federal loan.
Unlike a federal loan, your financial need is not considered when taking out private student loans. Instead, the private lender will consider your credit score, income, debt-to-income ratio, and employment history to decide if you’re eligible and your interest rates.
You might need a cosigner with a private student loan if you don’t qualify under the lender’s criteria.
Since private lenders’ terms can vary, be sure to shop around to find the best private student loan rates.
2. You’ll likely need a cosigner
Since lenders determine your eligibility for a private student loan based on your credit history, they’ll need to look at your income and debt-to-income ratio. This might be something you don’t have as a high school student, and you will, therefore, need to apply for private student loans with a cosigner. In fact, 90% of undergraduate students need a cosigner to qualify, according to Edvisors.
What does this mean exactly? Since you don’t have the financial history to prove you can comfortably repay the private student loan, you will need someone who does have that history to vouch on your behalf.
Once you have found someone to agree to be your cosigner, the lender will look at that person’s financial information to determine eligibility. If they have a low credit score, it could mean they don’t qualify or that there will be a higher interest rate on the loan. So, be sure to find someone in excellent financial standing to ensure you’re getting the best rates possible.
But just because you have a private student loan with cosigner support doesn’t mean you’re off the hook for paying it back. Technically, you’re still the primary borrower and in charge of all repayment. Your cosigner would only be required to pay if you can’t.
3. You’re responsible for private student loans
With private student loans, you will either be eligible to take them out yourself or will need a cosigner. In both scenarios, you will be responsible for paying the loan back. The only difference is that if you have a cosigner, they will have to make repayments if you don’t have the financial means.
Even though your cosigner serves as a backup if you can’t pay, this doesn’t mean you should rely on them. Remember it is still 100% your responsibility, so make sure you can meet whatever repayment terms your lender has issued. Not being able to pay could hurt your credit and your cosigner’s credit, possibly preventing both of you from reaching future financial goals.
4. You might have multiple repayment options
With federal loans, you don’t have to start making payments until you’ve graduated or dropped below half-time enrollment status, and there are many payback options, including income-driven repayment plans. With private student loans, repayment options are more limited since they’re determined by the lender.
Although every lender is different, it’s likely you will have three main repayment options.
You would have to start making payments on both the principal and interest while you’re still in school. This is helpful because it would keep the overall loan amount down since less interest will accrue. But if you don’t have an income then you might have trouble paying.
You would have to make payments while still in school, but it would only be the interest. This would still keep some overall costs down since the interest won’t accrue, but not as much as the immediate repayment option. This type of payment could help if you have some income, but not enough to pay principal and interest.
You would only start paying once you graduate or drop below half-time enrollment. Interest will accrue, however, making the overall loan amount higher. But you don’t have to worry about making payments while in school.
With such a variety of repayment terms, it’s key to thoroughly understand yours before accepting the loan. Make sure you can maintain the repayment schedule and know that the longer you have to make payments, the more you’ll probably have to pay overall because interest accrues.
The pros and cons of private student loans
Now that you know the basics, it’s good to be aware of the benefits — and possible drawbacks. There are many pros and cons to private student loans, so consider them all before deciding to take one.
Pros of private student loans
You tend to have higher borrowing limits.
You don’t need to be eligible for financial aid.
You could get a better interest rate than a federal loan, depending on your credit score or that of your cosigner.
There is no deadline to apply for a private loan, so you can apply in the middle of the semester if you find you need more money. Just have a few weeks worth of a buffer to allow for the application process to be completed.
Cons of private student loans
If you have a low credit score, you might not qualify for a private student loan.
Since interest rates are determined based on you or your cosigner’s credit score, then you could have a higher rate than a federal loan if you have a low score.
Your repayment options are more limited compared to a federal loan, and you might have to start paying while you’re still in school.
Don’t freak out about private student loans
It might seem like there’s a lot of information to wrap your head around with private student loans, but knowing a few basics will help you make an informed decision. Use this guide as a resource to have a conversation with your prospective lenders — and with your parents — so you completely understand how much you owe and when you need to pay it. This will help set you up for financial success in the long run.
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|2 Important Disclosures for College Ave.
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.
(1)All rates shown include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
(2)This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with an 8-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 7% variable Annual Percentage Rate (“APR”): 96 monthly payments of $179.28 while in the repayment period, for a total amount of payments of $17,211.20. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
(3)As certified by your school and less any other financial aid you might receive. Minimum $1,000.
Information advertised valid as of 5/22/2019. Variable interest rates may increase after consummation.
* 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.
3 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
4 Important Disclosures for Discover.
5 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.
©2019 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
6 Important Disclosures for LendKey.
7 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.
8 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|3.99% – 11.32%2||Undergraduate, Graduate, and Parents|
|4.50% – 11.35%*,3||Undergraduate and Graduate|
|4.84% – 13.49%4||Undergraduate and Graduate|
|4.25% – 11.30%5||Undergraduate and Graduate|
|4.50% – 9.47%6||Undergraduate and Graduate|
|3.74% – 9.72%7||Undergraduate, Graduate, and Parents|
|4.45% – 12.32%8||Undergraduate, Graduate, and Parents|