Loans

The ultimate guide to private student loans

When grants, scholarships and federal student loans aren’t enough, you can usually turn to private student loans to cover the cost of higher education. Private student loans are loans that come from banks, credit unions or online lenders. They can help pay for tuition, fees, housing, books and more.

While there are some upsides to private student loans, they’re not the right choice for everyone. Here’s what to know before applying.

What is a private student loan?

Private student loans are student loans that come from private lenders, like banks and other financial institutions, rather than the federal government. Each lender sets its own criteria for eligibility, including credit scores, income and repayment terms. This makes private student loans a little harder to qualify for; you’ll generally need good or excellent credit to get a private student loan, whereas many federal student loans don’t even require a credit check.

However, private student loans are often more customizable than federal loans. You may be able to choose between a fixed and variable interest rate, and you can usually select among several different repayment timelines. If you have great credit, you could score an exceptionally low interest rate.

How much can you borrow with private student loans?

One of the benefits of private student loans is that many let you borrow up to the full cost of your education. That said, the total amount you can borrow in private student loans varies by lender, your credit score, your major and whether you have a co-signer.

Some lenders cap your total amount with a lifetime loan limit, and that limit could depend on the type of private student loan you’re applying for. For example, CommonBond sets its borrowing limit for medical school loans based on a school’s “published cost of attendance (COA) minus scholarships and other forms of assistance such as scholarships, grants, fellowships, and other financial aid.” However, it also sets a lifetime borrowing limit of $500,000. Its MBA loans, on the other hand, set a maximum of $110,000 per academic year.

Pros and cons of private student loans

Private student loans come with some great benefits, but consider the downsides as well.

Pros

  • High loan amounts. Federal student loans have annual caps that can be as low as $5,500 for undergraduate dependents. After you max out your federal student loans, you may still need money to cover additional costs. Private student loans can help to fill in the gaps.
  • Quick application process. While federal student loans require borrowers to fill out the Free Application for Federal Student Aid (FAFSA), private student loans do not. You can apply for most private student loans online in a matter of minutes without providing nearly as much information.
  • Available for part-time college students. You have to be enrolled in school at least half time to qualify for federal Direct Loans, but some private lenders will let you borrow money if you attend school less often than that.
  • Competitive interest rates. Student loan interest rates and loan terms can be incredibly generous for borrowers with excellent credit or a qualified co-signer. If you want to pay as little interest as possible on your student loans, private student loans are often the best way to do it.

Cons

  • Fewer repayment options. Private student loans tend to come with shorter repayment timelines than federal loans; with some federal loans, you can take up to 30 years to repay, while most private student loans have caps of 15 or 20 years.
  • No government-sponsored public service or teacher loan forgiveness. Programs like Public Service Loan Forgiveness (PSLF) are not available for private loans. In general, there are few forgiveness options for private loans.
  • No income-driven payment plans. Some federal student loans can be repaid on income-driven repayment plans, which adjust your monthly payment based on your income. Private student loans typically only have traditional repayment options.
  • No government deferment or forbearance. While some private student loans have hardship options if you’re having trouble making payments, these programs are not nearly as robust as federal student loans’ deferment and forbearance programs.

Is taking out a private student loan worth it?

Most experts suggest maximizing federal student loans and aid before you turn to private student loans. That way, you will have access to income-driven repayment plans if you want them, as well as protections like deferment and forbearance.

If you still need money to fund your education or related expenses — like books, supplies, child care or even transportation — consider private student loans. And only borrow what you need; the more you borrow now, the more you’ll pay back after you graduate.

Other scenarios where private loans make sense include:

  • You have a specific plan to repay the money you borrow in a short amount of time. If you’re confident in your ability to repay your student loan balance and you believe you’ll have the income to do it, private student loans could cost you less interest.
  • Your expenses suddenly change. If you already maxed out federal student loans and your college expenses suddenly go up, private student loans can help you access more funding quickly.

How do you qualify for a private student loan?

If you’re looking into private student loans, you’ll need to get your finances in order first. Lenders typically look for:

  • Good credit: The better your credit score, the more likely you are to qualify for private student loans at the lowest interest rate available. If your credit score is too low, you may need a co-signer.
  • High income: Lenders want to see if you’re in a place to comfortably repay your student loans. You or your co-signer will need to prove that you have a solid income to pay your student loans.
  • Low debt-to-income ratio: If you have a lot of debt relative to your income, lenders will be more hesitant to lend you money. Try to aim for a debt-to-income ratio of less than 50 percent.
  • Citizenship: Many lenders require you to be at least 18 years old and have U.S. citizenship. International students are eligible with some lenders as long as they have a U.S. citizen co-sign their loans.
  • Eligible school or program: Lenders may check out your school to verify your enrollment, and some only work with certain schools. They will also check your total cost of attendance minus other aid to make sure that you’re not borrowing more than you legitimately need. If you’re not currently enrolled or accepted into an eligible program, you might not qualify for private student loans.

How to choose the best private student loan

It’s important to shop around before you decide how you’re going to fund your education. In other words, take the time to compare loan options from multiple lenders; don’t just go with the first private student loan company you find. Here’s how to find the best one:

  • Choose between a fixed and variable rate. Many private lenders offer the choice between a fixed and a variable rate, but some offer only one or the other. Consider your priorities ahead of time so you know what to look for.
  • Compare interest rates. Interest rates determine how much your student loan will cost. Compare interest rate ranges from various private lenders to make sure that you’re getting one that works with your financial situation. If a lender offers it, take advantage of prequalification offers — that way, you can see what rate you qualify for without the lender doing a hard check on your credit report.
  • Apply for the right loan for your education. Not all private student loans are created equal, and some loans are meant for students in specific programs. For example, you will need to explore specific private loan programs if you’re pursuing an MBA or planning to attend medical or dental school.
  • Research each lender’s reputation. A lender’s reputation is just as important as yours when it comes to applying for a private student loan. There are lots of reputable third parties you can consider when you’re looking into a lender’s reputation, like the Better Business Bureau (BBB).
  • Browse benefits. Some lenders offer specific benefits with their private student loans. Some might offer programs that make payments more manageable after graduation. Others offer discounts when you sign up for automatic payments each month.
  • Ensure that the lender accepts your school. While a lender might sound good on paper, not all of them will work with every school. To find out if your school qualifies, you can check the lender website or call to inquire.

Repayment options for private student loans

Many private student loan lenders allow you to start repayment with a similar grace period to federal student loans: six months after graduation. But each lender offers different repayment terms, ranging from five years to 20. Some lenders are slightly more flexible than others when it comes to repayment timelines. With College Ave, for example, most loans let you choose between terms of five, eight, 10 or 15 years.

Another important detail to keep in mind is the fact that you can typically refinance your loans later on. This can be a good option if you don’t like the repayment plan you’re on and you want to secure a lower monthly payment or a different repayment timeline. You’ll lose out on federal benefits like deferment and forbearance when you refinance federal loans with a private lender, but consolidating loans in this way can potentially help you save money on interest and simplify your finances.

Is there any way to get private student loans forgiven?

Private student loans don’t offer forgiveness programs. Public Service Loan Forgiveness, for example, is exclusively a federal student loan benefit, as are income-driven repayment plans, which forgive loan balances after a number of years. Private loans are also exempt from student loan cancellation proposals President Biden has suggested in recent months. The only way private student loans can be forgiven is if the borrower dies or becomes permanently disabled.

Many private student loan lenders offer hardship assistance programs, but qualifications vary based on your lender and circumstances. There’s no standard across all private student loan lenders, so you’ll need to contact each one to see if you’re eligible.

Source: Bankrate / Image by gpointstudio from freepik.com

Joseph Tanner

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