You’ve gone through all of the steps to secure as many scholarships as possible for college and filled out the Free Application for Federal Student Aid (FAFSA). But you still have a gap in covering all the costs of attending school, so you need to take out private student loans.
You’re not alone.
In fact, more than $3 billion in private loans were borrowed from 2016 to 2017, according to data from MeasureOne. Undergraduate loans accounted for 89% of that staggering number. That’s not surprising considering the average cost of attending a four-year private institution is $33,480.
So, if you find yourself needing to take out private loans for college, here’s what you need to know.
What are private student loans?
Any federal student loans you secure by filling out the FAFSA are regulated by the government. Private student loans, on the other hand, are issued by independent financial institutions such as banks or loan-lending organizations such as LendKey.
In both cases, the private lender will set the terms when it comes to eligibility requirements, repayment terms, and interest rates. Since there are so many variables, it’s important to shop around for private student loans before choosing the right one for you.
When you should take out private student loans
You should only consider private student loans once you’ve secured as much federal financial aid, grants, and scholarships as possible. Private student loans could come with higher interest rates and fewer borrower protections compared to federal loans, so they shouldn’t be your first line of defense.
Luckily, unlike federal loans, there’s no deadline to apply for private loans for college. That means you can wait to hear back from schools about all of your financing options before applying for private student loans. Also, if you face a sudden financial burden where you need more money mid-semester, for example, you can apply for a private loan.
Although there are no hard deadlines to apply for private student loans, it’s best not to wait until you’re in a pinch because the approval process could take time depending on the lender.
Understanding eligibility for private student loans
You’ve decided to apply for private student loans, but now you’re wondering if you even qualify. While eligibility requirements vary by lender, there are some standard factors typically taken into consideration:
- Credit score
- Debt-to-income ratio (how much you owe in monthly debt payments divided by your gross monthly income)
- If you’ll be using a cosigner
As an undergraduate student, it’s likely you won’t be able to get private student loans without cosigner support. In fact, 93% of private student loans were cosigned from 2016 to 2017, according to MeasureOne.
This is because most of the factors above require a level of 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 serve 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.
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 rules of thumb they follow:
- Cost of attendance limit: 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 limit: Some lenders might have a standard amount you are allowed to borrow in one academic year.
- Aggregate loan limit: Since you can apply for multiple private loans for college, you might face a limit on the number you can combine.
The repayment process for undergraduate private student loans
Since the government regulates federal loans, all of them have the same terms when it comes to repayment: You don’t have to start paying them back until you’ve graduated, you’ve dropped below half-time enrollment, or the loan has been fully disbursed. Some private student loan lenders might offer similar terms, but also have a variety of others as well.
Here are the most common repayment options for private student loans:
- 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.
- 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.
- Deferred repayment: Like a federal loan, you would only start repaying once you’ve graduated or dropped below half-time enrollment. 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.
- Fixed repayment: This is something in between an immediate repayment and interest-only repayment, with the lender determining a fixed amount 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.
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.
Meanwhile, the typical timeline to repay private student loans can range anywhere from five years to over 20 years.
3 pros and 3 cons of private 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 to consider when borrowing private student loans.
Pros of private student loans
Since private student loans don’t have to abide by the same regulations for federal loans, their terms could benefit you financially.
- 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.
- 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. With private student loans, you can borrow the entire cost of your education, including living expenses.
- 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 requirements, as each lender sets the eligibility terms.
Cons of private student loans
While you might find some advantages with choosing a private student loan to help finance your education, you should also consider the downsides.
- 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. According to the Federal Student Aid Office, private student loan rates can be 18.00% or more.
- 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. The government also has student loan forgiveness options. With private student loans, 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 a financial burden.
- The terms and regulations are at the whim of 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.
Taking out private student loans for college can be helpful if you don’t get all of the money you need through federal financial aid. Just make sure you consider all of these factors and read private student loan reviews to ensure you’re choosing the best private loan for your situation.
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