Private student loans are education loans that are provided by independent private lenders to both undergraduate, and graduate students who are willing to take out financing to pay for their college expenses. They are based on credit, and can provide you with up to the cost of attendance of going to your particular institution.
They typically carry adjustable interest rates that are in line with other types of consumer loans, and they will also come with a variety of fees, and other finance charges.
I recommend to students to consider taking out a private student loan when they have exhausted most of the other forms of financial aid that may be available to them, including federal student aid. This is because private student loans typically cost more than federal student loans, and because they come with very few repayment benefits the majority of the time.
Regardless, they can still provide students with a large amount of funding, and for many students private education loans make the difference between matriculating to school, and staying at home.
Interest Rates and Repayment
Most private student loans are made with an adjustable interest rate that consists of a margin that is added to a standardized index, such as the LIBOR or T-bill. Borrowers that are the most qualified will be eligible for the lowest margins, and the least amount of applicable fees.
Some of the common types of fees that are applied include:
- Application fees
- Origination fees
- Repayment fees
Fees can account for a significant amount of the total cost of your private student loan, and you should have an understanding of the specific fees that may come with a particular loan before you apply.
Beyond interest rates and fees, you also need to pay attention to several other areas that may affect the cost of your loan. These include:
- The amount of repayment benefits
- The term of your loan
- Interest rate reductions that may be available
- The presence of a cosigner-release clause.
Private student loans may, or may not come with repayment benefits such as deferment, and forbearance, and it is therefore in your best interest to know this before you apply.
Private education loans carry loan terms that can last typically somewhere between ten, and upwards of thirty years, and knowing this before you apply will give you a better idea of what your monthly payment will be. Interest rate reductions, and cosigner releases may be available upon your successful completion of a certain amount of consecutive payments. Make sure to find out about the availability of such options, as these can help lower your costs, and get your cosigner off the hook.
Getting Approved
Becoming eligible for a private student loan resides in your ability to demonstrate that you are actually attending college during the time periods that you specified on your application. To become eligible you therefore need to be a U.S. citizen or permanent resident attending a postsecondary institution who requires additional funding beyond their current financial aid award package to pay for what is the entire cost of attendance.
You should have no problem becoming “eligible”, and rather the difficulty in acquiring a private student loan resides in your ability to be able to pass the lender’s approval guidelines when it comes to credit. Private student loan lenders aren’t that much different than most consumer loan lenders, and will therefore require that you have good credit before they will approve your loan.
Most students haven’t had the opportunity to build up a significant credit history, and therefore have to obtain a cosigner in order to get an approval.
Most private student loan lenders will encourage that you apply with a creditworthy cosigner regardless of your credit history. If you have a cosigner that is within your reach it is a smart move to apply with a cosigner even if you have good credit because this can reduce the lender’s risk, and may translate into a lower interest rate, or other kind of cost savings on your end.
Applying for a private student loan without a cosigner is not recommended unless you have stellar credit, and a substantial income, as most lenders will automatically deny your application once they see your credit history.
Finding a Lender
There is an abundance of private student loan lenders, and it is in your best interest to shop around as much as possible if you want to eventually get the best deal. Some of the private lenders that you may want to consider applying to include:
- Sallie Mae (salliemae.com)
- Chase (chasestudentloans.com)
- Citi (studentloan.com)
- Discover (discoverstudentloans.com)
- Wells Fargo (wellsfargo.com)
- Citizens Bank (citizensbank.com)
While this list is not meant to be comprehensive, these are the private student loan lenders that I’ve either heard good things about, or have had personal experience with. Most of these lenders will provide a thorough explanation of their particular loan product on their website, and it is in your best interest to go ahead and review each site in order to find the best deal.
Be careful though, as most private lenders will advertise their best rates and their entire line of benefits on their website, when only the most qualified borrowers will be eligible.
When evaluating lenders, you should pay special attention to various criteria, including interest rate, existence of fees, loan terms, repayment benefits, interest rate reductions, and the availability of a cosigner release clause.
Because private lenders will typically only advertise the best rates and terms that are available to only the most qualified of borrowers, you may have to personally contact the lender you are thinking about applying to in order to get a better idea of where you stand, especially if your application may not be the strongest.
When to Apply and Disbursement
I recommend to students that they only apply for private student loans once they have exhausted the other major forms of aid, including federal student loans. This means that you should probably wait to apply until you have received your financial aid award package from your school, as this should detail the variety of aid you have already been able to secure.
- By subtracting the amount of aid you received via your award letter from your cost of attendance you can come up with the amount of additional money that you are going to need.
If you have the ability to pay this remaining balance out of pocket, then by all means go ahead and do that. You may, or may not want to look into getting a private student loan depending on the strength of your financial situation, as it is sometimes better to simply pay directly out of pocket when compared to going into debt with private financing.
If you do decide to apply for private loans, you should go do so upon having a firm grip on the exact amount of funding you will need beyond your current financial aid award package, as this is when most student borrowers apply for their private financing.
The proceeds of most private student loans will be sent directly to your school, although some private student loan lenders will make it so that you can have a check sent directly to your place of residence. The lenders who allow student borrowers to do this provide what are known as uncertified student loans, as these loans do not have to be certified by a school official before they can be approved and disbursed to their student borrowers.
Most private lenders provide certified student loans that must be certified by your school before they can be approved, and disbursed, and it is best to figure out what kind of lender you are applying to beforehand in order to avoid any unexpected surprises, or disappointments.
Final Notes on Private Student Loans
Private student loans may be necessary when you desperately need additional funding to pay for school. They should only be used as a last resort, and they should never be abused, or taken for granted. Even though they exhibit many of the same characteristics as consumer loans, and credit cards, they cannot be discharged in bankruptcy under normal circumstances, and can therefore haunt you for a good portion of your life if you are not careful.
Remember that you should not overlook your ability to get PLUS Loans once you have received your award package from your school. These loans cost less, and have more repayment benefits than most private loans, and while still based in-part on credit, they can be a preferable option to taking out a lot of private student loan debt.
If you decide that you must get a private loan, pay special attention to your application, as having a cosigner, or taking the time out to improve your credit will ensure that you are given the best deal. In the end it is best to shop around as much as possible when comparing lenders, as each lender will be able to offer you a slightly different loan product that may benefit you in the long-run if you can become eligible.
