Private loans for students might be necessary to pay for college if you have exhausted federal financial aid options and other sources of funding. We’ve put together all the information you need to understand and apply for potential private student loans. Let’s get started!
What are Private Student Loans?
They are a credit-based college financing option. Unlike federal student loans, where the government is your lender, private loans may be available through banks, credit unions, state agencies, schools, or student loan companies like Sallie Mae.
Keep in mind that private loans for students may not have all the potential benefits of federal student loans, such as low, fixed interest rates and income-driven repayment plans. So, it’s best to take advantage of all other forms of financial aid, including federal financial aid, federal student loans, and outside scholarships, before you consider private student loans.
Check out our video guide to proper use of private student loans:
Do I Qualify for Private Student Loans?
Much like auto or home loans, private student loans require an established credit record. If you don’t have credit, you’ll need a creditworthy cosigner such as a parent or other relative to help you qualify for a private loan. In addition, the interest rates you may be eligible for will be credit-based, meaning the rate will be higher or lower depending on your/your cosigner’s credit.
How to Evaluate Private Loans for Students
You can use our LoanFinder to compare student loans by interest rates or Annual Percentage Rate (APR), fees, repayment terms, and other loan features. Look for potential benefits, like interest rate reductions for automatic payments, or the ability to release your cosigner.
Keep in mind that terms and conditions for each loan may vary. It’s important to read everything and fully understand the terms you are offered before making a decision. If a parent or relative will be your cosigner, evaluate potential student loans together to make sure you’re on the same page.
Private Student Loan Interest Rates
Unlike federal loans, private student loans have interest rates that vary based on the borrower’s credit. In addition, you may have the option to choose fixed or variable interest rates. Fixed interest rates stay the same over the life of your loan. Variable rates often start out lower than fixed rates, but they fluctuate over the life of your loan. Your choice of one type of interest over another may depend on considerations such as the length of your loan and whether it’s important to you to have a predictable monthly payment.
Another factor to consider is that many private student loans offer a small interest rate reduction if the borrower enrolls in automatic payments. Receiving a 0.25% interest rate reduction is a common benefit for borrowers who elect to have their student loan payments directly debited from their bank account each month.
Limits on What You Can Borrow
Most private student loans allow a student to borrow up to their school's Cost of Attendance minus other financial aid, such as federal student loans. In some cases, the school's cost of attendance may exceed the maximum loan amount offered by the provider, and in other cases a student may not qualify for the full loan amount requested. Private loans often have a minimum that can be borrowed, which is usually around $1,000-$2,000.
Some loans may charge an origination fee, which is an amount charged to you at the time your loan is disbursed (paid to your school). Generally, the origination fee is calculated as a percentage of the amount you’re borrowing. This fee will then be added to the total amount of your loan.
The good news is that most private student loans do not charge an origination fee, though many federal loans do. Still, it’s important to read the fine print to make sure the private loan you are considering is fee-free.
Repaying Your Private Student Loans
Some lenders offer several choices of repayment plan, potentially giving you some flexibility in how you’d like to repay what you borrowed. For one, you may be able to choose the length of your repayment term, depending on how quickly you wish to pay back what you owe.
One feature of many private loans is the ability to completely postpone (defer) payment of principal and interest until you graduate from college. In some cases, you’ll pay nothing while you’re still in school. In other cases, you’ll make a small, flat monthly payment while you’re in school, usually in the range of $25 to $50.
Some lenders offer the option to make interest-only payments while you’re in college, potentially allowing you to save money over the life of your loan. And finally, certain lenders may allow you to begin making full payments on both your principal and interest while you are still in college, which may lead to the most significant cost savings in the long run.
Keep in mind that not every lender will offer all of these potential repayment paths, so do your homework to find student loans that fit your long-term plan.
How Long Will It Take to Pay Back My Private Loan?
That depends on the loan program you selected, how much you borrow, and the repayment plan you choose, among other factors. Repayment terms often range between 10 and 20 years, though they may be shorter or longer.
And, guess what: you can finish repaying your student loan as quickly as you are willing and able to! There are no penalties for making extra payments (known as prepayments) or paying extra on your loan each month.
Are There Alternatives to Private Student Loans?
Besides federal financial aid, scholarships, grants, and your savings, private student loans may be one of the more attractive ways to pay for college. For one, private loans for students almost always offer better terms than credit cards, which tend to have higher interest rates and less flexible repayment options.
Private loans can also be a good alternative to a home equity line of credit (HELOC), in which your house is used as collateral. While HELOCs may offer competitive interest rates, they also require you (or, more likely, your parents) to borrow against the value of your house. That means risking your home, in the event you can’t repay what you borrowed. If you are considering a HELOC, it’s a good idea to talk to a professional financial planner, first.
Another potential option is the federal Direct PLUS Loan for Parents, in which the parent – not the student – is the borrower. While there are pros and cons to Direct PLUS Loans, one possible drawback is that parents are ultimately responsible for repaying these. Parents who would prefer their children to be responsible for the costs of their education may ultimately decide that a private loan is the way to go.
In addition, Direct PLUS Loans have an interest rate of 7% (current through July 2018), and an origination fee of 4.264% (current through October 2018). While in many cases federal loans offer less expensive terms than private education loans, it may be possible to qualify for private loans that are more competitive than Direct PLUS Loans.
Are There Benefits to Taking Out Private Student Loans?
Borrowing money for college may feel like a burden. But could there be some potential benefits to taking out loans? Some parents may feel that when students are responsible for their own loans, they learn valuable life skills like smart money management and long-term planning. In addition, making on-time monthly loan payments on federal or private loans could be a great way for students to build credit, which may be helpful when it comes to future endeavors, like buying a house.
Compare Private Loans Before Borrowing
A private education loan can be an attractive and affordable option to help pay for education expenses. However, it is also a big responsibility. Remember to first consider federal financial aid and other less costly ways of paying for school. Borrow only what you need for your college expenses. And, be sure to compare lenders before borrowing, to increase the chance of finding the loan that makes sense for your needs.
Our Private Loan Partners
Applying for a private loan online doesn’t take long, and you can see your result in a matter of minutes. Apply with one of our loan partners online:
- Looking for last-minute money for college? Check out the Smart Option Student Loan by Sallie Mae, which offers three repayment options and competitive interest rates to fit your financial needs. Learn more and apply today!
- The Ascent Tuition Student Loan features affordable variable rates, flexible repayment options and no application fees. Co-signers such as a parent or guardian are strongly recommended to increase your chance of approval. Click here to apply now.
- The College Ave Student Loan can help you get the money you need for college or graduate school with a fast application and instant credit decision. Click here to apply now.
- CommonBond offers straightforward student loans with great rates, award-winning service, and strong borrower protections. Learn more and apply today!