Your Expert Guide to Private Student Loans

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Understanding student loans can be daunting, especially if you’re trying to determine whether taking out a private student loan is right for you. They’re very different from federal loans: That’s because private loans often require a cosigner, lack the same repayment flexibility and carry interest rates determined by credit.

But in some cases, private student loans can make college possible if federal loans don’t completely cover your education costs. Read on to find out what to consider before taking out a private loan for school, and how to know which loans are right for you.

In this guide to private student loans, we’ll look at:

What is a private student loan?
Benefits, drawbacks of private student loans
Should you apply for private student loans?
What to look for in private student loans
When you need to apply for private student loans
How to pay off your private student loans

What is a private student loan?

When you fill out the Free Application for Federal Student Aid (FAFSA), you become eligible for grants, federal student loans and work-study. But if you can’t access enough funds to cover your college expenses, private student loans can help fill the gap.

The major difference between federal and private student loans is who lends them. The Department of Education provides federal student loans, and a student loan servicer assigned by the government collects payments when you graduate.

Private student loans are not offered by the Department of Education. Private lenders, which comprise banks, credit unions and online companies, work with you to fund and manage the loans if you qualify, much the same as with other types of loans. You choose a lender, fill out an application, go through a credit check and find out if you’re approved or denied.

Here’s what you need to know about taking out a private student loan:

  • The interest rates are either fixed or variable, and they can be quite high. Private student loan interest rates can reach as high as nearly 14.00%, even at the most reputable lenders.
  • Depending on your lender and repayment plan, repayment of your loans could begin as soon as they’re disbursed to you.
  • Private student loans generally don’t come with as many borrower protections as federal student loans do, and typically don’t offer income-driven repayment plans or student loan forgiveness.
  • To qualify for approval for a private loan, you will likely need a cosigner — as was the case for about 92% of undergraduate private student loan borrowers in the 2019-2020 academic year, according to a report by student loan data research firm MeasureOne.
  • Similar to federal student loans, private student loans have been historically difficult to discharge through bankruptcy.

How much you can borrow with private student loans

Every lender has its own set of parameters to determine how much they will let you borrow. These are the typical limits set by lenders:

  • Cost of attendance: A lender might only issue a loan for the total cost of attendance minus the financial aid you’ve received. If your undergraduate college costs $50,000, and you got $25,000 in federal aid, then the most you could borrow would be $25,000. That cost includes tuition and living expenses.
  • Annual loan amount: Some lenders might have a standard amount you are allowed to borrow in one academic year.
  • Aggregate loan value: Since you can apply for multiple private loans for college, you might face a limit on the number you can combine. Some lenders set a maximum threshold of your total borrowing, which includes federal loans you’ve borrowed.

Benefits, drawbacks of private student loans

Private student loan reviews can be both positive and negative, depending on the financial situation of the borrower. But in general, there are some standard pros and cons of private student loans.

3 benefits of taking out a private student loan

Since private student loans don’t have to abide by the same regulations for federal loans, their terms could benefit you financially.

  1. You could get a lower interest rate: With federal student loans, you will pay a standard interest rate. Private student loan interest rates, on the other hand, are set by the lender and determined by your credit score. That means you might be able to get a lower rate than the one offered by the government, and that equates to less debt overall.
  2. You can borrow more: While private lenders have limits on how much you can borrow, it could be more than what you’d receive through federal aid. The aggregate amount you are allowed to borrow through federal aid is capped at $57,500 for an undergraduate. When taking out a private loan for school, you can borrow the entire cost of your education, including living expenses.
  3. You don’t need to be eligible for financial aid: The Federal Student Aid Office has standards that students must meet to qualify for any financial aid, including federal student loans. Many students will meet these requirements, but some might not. International students, for example, are not eligible, and you could lose your eligibility if your GPA falls below a given level. Private student loans don’t have those broad requirements, as each lender sets the eligibility terms.

3 drawbacks of taking out a private student loan

While you might find some advantages with choosing a private student loan to help finance your education, you should also consider the downsides.

  1. Interest rates are varied: Since your credit score often determines interest rates for private student loans, it can be both positive and negative. While someone with a high credit score could get a lower interest rate, someone taking out private student loans with bad credit might face a higher rate compared to a federal loan.
  2. Repayment terms aren’t as flexible: There are many ways you can pay back federal student loans to suit your financial situation, including income-driven repayment plans that keep your monthly payments affordable. Plus, the government also has student loan forgiveness options. With private student loans, however, the repayment terms are much more limited. You might have to start paying them back while still in school, and you might not have deferment or forbearance options. This means you could have a hard time paying them back if you face financial difficulty.
  3. The terms and regulations are determined by lenders: With federal student loans, the government sets standard terms. This standardization makes understanding the loans simpler compared to private student loans, which are much more variable in their terms and regulations. Private lenders can set the repayment terms, eligibility requirements and more. This could make it confusing for borrowers and lead to you paying more if you don’t understand exactly what you’re signing up for.

Should you apply for private student loans?

It’s best to get as much federal student aid as possible before taking out a private student loan. That’s because federal student loans come with a large variety of borrower protections that private loans do not — private student loans generally don’t offer things like income-driven repayment options, subsidized interest or loan forgiveness. It can also be more difficult to postpone payments on a private loan than it would be for a federal loan.

Also, federal student loans don’t carry the double-digit interest rates that private student loans can. Unlike private loan rates, federal student loan interest rates are set by Congress. For the 2019-2020 academic year, federal student loan rates ranged from 4.53% to 7.08%, though rates were set to dip significantly.

If you decide to borrow from a private lender, take the steps below for your best chance at success.

Consider your eligibility

While eligibility requirements vary by lender, there are some standard factors typically taken into consideration:

  • Credit score
  • Income
  • Debt-to-income ratio (how much you owe in monthly debt payments divided by your gross monthly income)

As an undergraduate student, it’s likely you won’t be able to meet the criteria above without cosigner support. The first thought might be to ask a parent or other family member, though you’re not limited to those options and could find a cosigner elsewhere.

Private student loan companies encourage or require cosigners for undergraduate students because they seek reliable borrowers. Specifically, they’re seeking steady employment and positive credit history, something many undergraduate students don’t have. So, eligibility for these loans will fall on the cosigners’ financial background.

But if you’re limited regarding finding a financially stable cosigner, don’t fret yet. A cosigner might be able to get private student loans with bad credit — the interest rates just might be higher than if they had good credit. This, of course, will vary by lender.

Just remember, you are still considered the primary borrower and will be on the hook to pay back the loan. A cosigner is meant to function more like insurance for the lender if for some reason you can’t pay. But you should understand the repayment terms before accepting the loan to make sure you’ll be able to repay it and not have the burden fall on your cosigner.

What is cosigner release?
After you’ve reached a certain income level and credit score — and after you’ve made a certain number of on-time payments — you could reward your cosigner by removing them from your loan agreement. Check if your private student lender offers cosigner release and what the requirements are.

Ask yourself these questions before you apply

Finally, if you’re thinking of taking out a private loan for school, it’s important to know if you’re ready for it. Here are some questions to consider:

  • Have you done the math on the amount you’ll take out, multiplied by your student loan interest rate? Use our student loan payment calculator to understand how much you could pay monthly and over time.
  • Do you know when your first payment will come due — and will you be able to afford it when your repayment period begins?
  • Are you planning on borrowing the minimum amount that you need, which is recommended, rather than adding a little extra to have a better lifestyle?

Since private loans come with more stringent repayment requirements than federal loans, it’s important to know the weight of the debt you’re considering taking on.

What to look for in private student loans

If you’ve gotten this far and decided you’re interested in applying, then the next step is to shop around for private student loans. To make sure you’re getting your best deal possible, use the following tips.

How to take out a private student loan: Shop around first

There are many places to search for and compare private student loan options, including in our private student loan marketplace. As you compare lenders:

  • Seek out lenders advertising the lowest interest rates.
  • Look for repayment terms that you’ll be able to afford when you graduate.
  • Make sure the lender offers the amount of money you’ll need to cover what other types of financial aid won’t.
  • See which lender offers bonus features, such as interest rate reductions for automatic payments and forbearance and deferment, in case you encounter hard financial times. Also, look for lenders with positive customer service reviews.

Repayment options for private loans

Private student loans come with a variety of repayment plans. Each lender calls them by a different name, but here are some options that a plan may offer.

  • Deferred repayment: You would only start repaying once you’ve graduated or dropped below half-time enrollment and, in many cases, exhausted a six-month grace period, similar to that of federal loans. This is helpful because you won’t have to worry about making any payments while in school, but you might end up paying more overall because the interest will accrue during that time.
  • Interest-only repayment: You will only pay the interest while in school and then start making principal payments once you’ve graduated or drop below half-time enrollment. In this scenario, you can still save money because the interest won’t be building while you’re in college. It’s also less of a burden on you financially, since the monthly amount wouldn’t be as high as if you had to pay both the interest and principal while in school. A part-time job, for example, could cover this cost. Some lenders might also offer lower interest rates if you accept these terms.
  • Fixed repayment: This is something in between an interest-only and immediate repayment, with the lender determining a fixed amount (such as $25) you’ll pay every month while in school. This amount will then get adjusted once you graduate or drop below the half-time enrollment to a new amount that includes paying back the interest and principal.
  • Immediate repayment: With this option, you start making principal and interest payments while still in college. This is helpful because you can save money on the amount of total interest and pay the loan off faster. Some lenders might even offer lower interest rates if you agree to these terms. But making payments while you’re in school can be tough if you don’t have the income.

If you want to make even the slightest dent in your debt, fixed repayment could be a helpful option because the monthly payments will be more affordable, and it can bring down the amount you have to pay overall. But it still won’t make as big of an impact as the immediate or interest-only repayment options.

When taking out a private student loan, you’ll also encounter a variety of repayment terms and interest rates. Plan terms can go from five years to 20 years, with either fixed or variable interest rates.

To choose a plan, evaluate what your financial situation might be during and after school. Will you work part-time while in college? Consider a plan that has you making some payments in school so you can get ahead. If you choose a variable rate over a fixed rate, make sure you’re comfortable with a possible rate increase in the future, and consider making payments while it’s still low.

When you need to apply for private student loans

When you’re ready to apply for a private student loan, you don’t need to submit a FAFSA to get approved. You can apply at any time, but wait to see how much federal aid you’ll receive first.

But, don’t wait until just before the start of school to apply. The length of time it takes to complete the application process will vary by lender. The lender College Ave, for instance, recommends the following timeline:

Days before school startsAction items
90Estimate your need, find a cosigner
60Apply for rates with lenders that perform a soft credit check
30Complete a formal application with your preferred lender
10Confirm that your loan is on its way

How to pay off your private student loans

Once you have your private student loans, start strategizing your payoff plan. Here’s how.

If you’re in school

If you opted for a fixed payment plan or no payments while in school, you could still get ahead by making payments as soon as the loan is disbursed.

It might seem impossible to find extra money to apply to your loans while you’re in school. But this is the best time to practice saving. If you can build the habit of putting money away when you’re earning less, it’ll be that much easier to stick with it when you start to earn more.

Consider putting aside a certain amount from a part-time college job, if you have one, each week. That money could go to your loans or to a savings account for repayment later if you opted to defer payments. Also, think about sending tax refunds and other extra funds toward student loans. Try using an extra payment calculator to see what that could mean for you.

If you’re having trouble finding work

Dealing with hefty student loan payments while looking for a job can be stressful. Keep an eye on your situation and contact your lender as soon as possible if you know you won’t be able to afford an upcoming payment.

Each private student loan lender offers different options for those struggling to repay. Two options are deferment and forbearance, which enable you to temporarily suspend your payments while you get back on your feet. Talk to your lender to find out exactly what they offer and what criteria you need to meet to qualify.

Private student loan default can have severe consequences, and it’s not something your lender wants, either. The sooner you communicate the difficulty you’re having, the better your chances of working out a solution with your lender.

If you’re employed and already paying down your loans

If you’re working and easily making your loan payments, consider what you can do to pay your loans down even faster if you have a high or variable interest rate.

And if you have multiple student loans, consider using the debt avalanche method, which means paying down the debt with the highest interest rate first while making the minimum payments on other loans. When that high-interest debt is paid off, apply what you were paying monthly to your loan with the next-highest interest rate. That can knock years off your debt — and potentially hundreds to thousands of dollars.

Some borrowers prefer the debt snowball method, which targets the lowest balances first. For them, seeing a loan get paid off sooner keeps them motivated.

The information in this article is accurate as of the date of publishing.

Andrew Pentis and Sarah Li Cain contributed to this report.

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