Your Ultimate Guide to Private Student Loans

private student loans

Private student loans are a large and growing market. But they’re quite different from their government cousins. They often require a co-signer, lack the same repayment flexibility, and sometimes carry much higher interest rates.

That said, private student loans can sometimes be just what you need if federal loans don’t completely cover your education costs. So, how can you tell if you should take out a private student loan? And how do you know which ones might be right for you? Read on to find out.

What are private student loans?

When you fill out your FAFSA, you’re applying for grants, federal student loans, or both. But if you can’t access enough funds to cover your tuition, there’s another way: private student loans.

The major difference between private and federal student loans is who’s offering them. Since the Department of Education backs federal student loans, you work with a student loan servicer to pay them back.

For example, Federal Student Aid has an up-to-date list of servicers that handle Direct and FFEL Loans.

Private student loans, however, are not offered by the Department of Education. Instead, you work with private lenders to find and manage the loans, much the same as with other types of lending. You choose a lender, fill out an application, go through a credit check, and find out if you’re approved or denied.

Since private student loans require you to seek them out, you can’t accidentally fall into this type of loan by accepting the funds awarded to you from filling out your FAFSA.

Here are some more fast facts about private student loans:

  • The interest rates are either fixed or variable, and they can be quite high. The Institute for College Access and Success reported rates up to 13.74% last June.
  • Depending on your lender and repayment plan, repayment of your loans could begin immediately after disbursement.
  • Private student loans don’t come with as many borrower protections as federal student loans. They also lack income-driven repayment plans and student loan forgiveness.
  • To qualify for approval, you might need a co-signer — as was the case for 90 percent of private student loan borrowers, according to a 2012 study by the Consumer Financial Protection Bureau (CFPB).
  • As with federal student loans, private student loans are notoriously difficult to discharge through bankruptcy.

Finally, the processes for private student loans can vary more than those for federal student loans. This can lead to some confusion when it comes time to start repayment.

Should you apply for private student loans?

Before we get into the application process, it’s important to understand if this type of loan is right for you.

As a rule of thumb, it’s best to get as much federal student aid as you can before applying for private student loans. That’s because federal student loans come with a large variety of borrower protections that private loans do not.

Also, federal student loans don’t carry the double-digit interest rates that private student loans can. Unlike with private lenders, federal student loan interest rates are set by Congress. (Currently, federal student loan rates range from 4.45% to 7.00%, as reported by Federal Student Aid.)

If you do decide to borrow from a private lender, there are some issues to keep in mind. Take the steps below to ensure your best chance of success.

Have a co-signer ready

Chances are, you’ll need a co-signer to get approved. The first thought might be to ask a parent or other family member, though you’re not limited to those options.

And then there’s the issue of co-signer release, which enables you to become the sole person responsible for your loan after you’ve reached a certain income and credit score, and made a set amount of on-time payments. Although many private student loans offer co-signer release, it’s not easy to get — in fact, the 2012 CFPB study mentioned above showed that 90 percent of borrowers who applied for co-signer release were not able to successfully get it.

Therefore, it might be best for you and your co-signer to assume that you’ll both have your name on the loan until it’s paid off.

Ask yourself these questions before you sign

Finally, if you’re thinking of taking on a private student loan, it’s important to know if you’re ready for it. Here are some questions to ask yourself to be sure:

  • Have you done the math on the balance of the loans you’ll take out, multiplied by your interest rate? Here’s a student loan payment calculator to help.
  • Do you know when your first payment will come due — and can you afford it if it happens to be before you graduate?
  • Are you planning on taking out the minimum that you need (recommended) rather than adding a little extra to have a better lifestyle?

Since these loans come with even greater responsibility than federal student loans (read: more stringent repayment requirements), it’s important to know the weight of the debt you’re considering taking on.

Where (and how) to find the right private student loan

If you’ve gotten this far and decided you’re interested in applying, then the next step is to shop around for the best private student loan for you.

Even though the situation can feel desperate (perhaps you need to close those loans ASAP to enroll in the next round of classes), you should still make sure you’re getting the best deal possible.

Things to consider as you shop around

There are many places to search for and compare private student loan options, including in our private student loan marketplace. So, what are you looking for as you compare lenders? Here are a few guidelines to follow:

  • Get the lowest interest rate possible.
  • Look for the repayment terms that you find the most comfortable.
  • Make sure the lender offers enough for you to fill the gap.
  • See who offers bonus features, such as interest rate reductions for automatic payments, forbearance and deferment in case you encounter hard financial times, and positive reviews of their customer service.

And if anything raises a red flag in the process, don’t proceed with that lender. Remember, these loans are nearly impossible to discharge. Once you sign on that dotted line, you’re stuck with the loan.

Even if it delays the start of your next classes, it’s better to find a lender you can trust than to get trapped in a situation that will hurt your financial future.

What to look for as you choose a repayment plan

Private student loans come with a variety of repayment plans. Each lender calls them by a different name, but here’s the general gist.

  • Full monthly payments due right away
  • Small monthly payments while you’re in school
  • Interest-only payments while you’re in school
  • Deferred payments until you finish or leave school

You’ll also encounter a variety of repayment terms and interest rates. Plans can go from five years to 15 years, with either fixed or variable interest rates.

So, how do you choose?

Consider what your situation might be during and after school. Will you be working part-time? Consider a plan that has you making some payments in school so you can get ahead. Are you offered a lower variable rate than the fixed rate? And if you choose the variable rate, make sure you’re comfortable with the idea of it going up at any time, and consider making payments while the rate is still low.

It can be hard to choose a plan when you don’t know what the future holds. Do the best you can to understand what your options will be in school and after. And make sure you know what the payments will be for all the plans offered.

When you need to apply for private student loans

The good news about private student loans is that you don’t have to turn in the FAFSA to get approved. You can apply at any time, though ideally, you’ll wait to see what you can get from federal aid first.

Although you can get these loans close to when tuition is due, don’t cut it too close. Every lender will vary on the length of time it takes to complete an application process. If possible, give yourself a buffer of a few weeks to a month to be sure you’ll get the funds you need in time.

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

This answer will depend on the type of repayment plan you chose. If you opted for a low fixed payment plan or no payments, you could still get ahead by paying extra.

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 (and this goes for federal loan borrowers as well). If you can build the habit of putting money away when you earn less, it’ll be that much easier to stick with it when you earn more.

Consider putting aside a few dollars from your part-time job (if you have one) each week. That money could go to your loans or a savings account to use on your loans after graduation if you opted to defer payments. Also, think about spending tax refunds and other extra funds on bulk student loan payments. These small actions can take a nice chunk out of your balance before you even graduate.

Don’t believe me? Try this lump sum extra payment calculator and see what happens.

If you’re having trouble finding work

Dealing with hefty student loan payments while looking for a job can be demoralizing or even financially crippling in the worst case. Keep an eye on your situation and contact your lender if you approach crippling status.

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

It might seem counterintuitive to tell the company that’s financially backing you that you can’t pay, but it’s not. Private student loan default can have severe consequences for you, and it’s not something your lender wants either. The sooner your communicate the difficulty you’re having, the better your chances of working out a solution.

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 more quickly if you have a high or variable interest rate.

And if you have multiple student loans, consider the debt avalanche method. This works by paying down the debt with the highest interest rate first. And when that debt is paid off, apply what you were paying on it to your loan with the next-highest interest rate.

Going after the highest interest rate first means tackling the costliest part soonest. Continuing to pay the same amount on your debt even after you pay off one loan builds momentum. And that can knock years off your debt — and potentially hundreds to thousands of dollars.

Some people prefer the debt snowball method, which targets the lowest balances first. For them, the motivation of seeing a loan get knocked out sooner makes all the difference. There’s no right or wrong answer to which you should choose. Just know that keeping a targeted approach to your debt payoff can make all the difference.

Life with private student loans

Graduating without student debt is no easy feat. Nearly 70 percent of seniors graduating in 2015 had to take on student loans to do so, according to The Institute for College Access and Success. The key is managing the process early by carefully considering your options before you sign.

And when you graduate and find employment, maintain control over your student loans. Life with private student loans can be a good one. After all, the loans help you get an education that can open doors. Just make sure you’re setting yourself up for debt that you can manage by only taking out what you need and with repayment terms you can handle.

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