Private student loans, also known as private education loans or alternative education loans, can help fund your education gap when federal aid, scholarships and savings don’t fully cover the cost of school. Private loans are offered by many banks and each have their own requirements, interest rates, and protections. Before you borrow money for college, it helps to understand a few important things about private student loans.
What Is A Private Student Loan?
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A private student loans is a type of student loan offered by banks, credit unions and other private lending institutions. These loans are created specifically to help college students bridge the gap between their higher education costs and other financial aid.
When it comes to funding for college, it’s generally recommended that students first exhaust their gift-aid options. These include merit-based scholarships and need-based grants. Unlike federal and private loans, gift aid doesn’t need to be paid back. If students still need additional financial aid, they turn to federal student loans and private student loans. Federal student loans are usually given first preference because of the lower interest rates and more flexible payment options. However, there is a cap on how much students can borrow every year in federal loans.
If you hit your borrowing limit for the academic year but still need more funds, private student loans are an excellent option to explore.
How Private Student Loans Work
If you need to take a private student loan, you have apply with a private lender – a bank, credit union, or other lending institution. Each lender sets its own interest rate, lending terms and conditions. If this is an option you are considering, you’ll want to research lenders, determine eligibility criteria, and interest rates to find a lender that suits your requirements.
On receiving your loan application, the lender checks your credit history and other credentials to determine approval. If you are approved for a loan, you will receive a formal agreement with details of the terms and conditions. After you sign the agreement, the lender typically sends the funds directly to your school to be applied to your current charges.
Interest on private student loans starts accruing from the date that the funds are disbursed to your school. Most lenders will allow you to defer your loan repayments while you’re in school and continuing up to the end of your grace period, generally 6 months after graduation day. That means your loan repayments start six months after you graduate. However, it’s important to note that only the payments are deferred, not interest accrual since interest accrual starts at the time your loan is disbursed.
Borrowing Limits & Processing Time for Private Student Loans
Generally, private lenders allow you to borrow up to your total cost of attendance, including tuition, fees, books, room, board, and school supplies. This limit may vary among lenders depending on each lender’s credit policies. Regardless, the loan amount cannot exceed the total cost of attendance. The lender will request your school’s financial office to confirm and certify your enrollment, loan amount, and projected graduation date. This verification process can take several days to a few weeks or even months.
The exact amount of time it takes to process a private loan and disburse the funds depends on the lender and also the time of the year. Since the start of the academic year is peak time for processing loans, it could take longer for your funds to be disbursed. In general, you can expect to receive the funds anywhere between 2 weeks to 2 months from the date you submit your application.
Pro tip: keep the deadlines for fee payments in mind and when applying for private student loans. Make sure to submit your application early enough to meet the fee payment deadline so you don’t incur any late fee payments unnecessarily.
Private Student Loans Vs. Federal Student Loans
Private student loans are funded by private financial institutions, while federal student loans are funded by the federal government. Both of these loan types differ widely in terms of interest rates, eligibility criteria, and repayment terms and conditions.
Here’s a snapshot of the differences between private student loans and federal student loans:
| Private Student Loans | Federal Student Loans |
|---|---|
| Offered by private lending institutions. | Offered by the federal government. |
| Borrowing limit depends on cost of attendance and personal financial credentials, primarily credit score and income. | Borrowing limit depends on cost of attendance, family finances, and individual circumstances. |
| Interest rate varies among lenders and is based on borrower’s or cosigners credit history. | Interest rate is set at the beginning of each academic year and is the same for all borrowers. |
| Students must apply to private lenders individually to access private loans. | Students must file the FAFSA to qualify for federal loans and other forms of federal financial aid. |
| Private lenders accept and process applications for student loans throughout the year. | The federal government accepts and processes student loan applications only during the application window, from October 1 to June 30. |
| Private student loans do not have income-based repayment or forgiveness options. (However, many private lenders offer forgiveness in instances of death or permanent disability of the student borrower.) | Federal student loans come with income-based repayment and forgiveness options. |
Pros And Cons Of Private Student Loans
Like any other financial tool, private student loans come with their own benefits and drawbacks. Weighing both aspects can help you decide whether they are right for you.
Benefits
- Higher loan limits: With federal student loans, your annual and aggregate limits are based on your family’s financial and personal circumstances. You cannot borrow more than your calculated limit regardless of the cost of attendance. With private student loans, you can borrow up to the annual cost of attendance as certified by your school. This higher borrowing limit makes it possible for you to enroll in a college of your choice even if it is more expensive rather than be constrained by a limited budget.
- Choice of fixed or variable interest rates: Federal loans only offer the fixed interest rate option while private lenders offer fixed and variable interest options. The interest rate on variable-rate loans is usually lower than fixed-rate loans. This can save you a lot if you can afford to pay off your loans quickly.
- Potentially qualify for better loan terms: While federal student loans come with a fixed interest rate for all borrowers, the interest rate on private student loans is based on your credit quality. Applying for a private loan with a qualified cosigner who has a strong credit profile could qualify you for a lower interest rate and better loan terms. This can add up to significant savings over the life of the loan.
Drawbacks
- Can be more difficult to qualify: It can be difficult to qualify for a private student loan without a good credit score and steady income or a cosigner who has a good credit score and steady income. With federal student loans, all students enrolled in an accredited institution qualify.
- Potentially higher interest rates: Private lenders determine interest rates based on the borrower’s financial credentials. If you or your cosigner don’t have a strong credit profile, you’ll generally pay a higher interest rate on your loan. On the other hand, interest rates on federal are fixed for the year and apply to all borrowers regardless of credit score or income.
- Fewer repayment options: Federal student loans offer multiple repayment plans that help lower your monthly payments. Although every private lender sets their own repayment policies, they rarely offer options that reduce monthly payments. The only way to lower the monthly payments on private student loans is by refinancing.
Eligibility For Private Student Loans
Since all private student loans are unique to the lender, eligibility requirements will vary among lenders.
In general, most lenders will look for:
- Credit history: A high credit score and positive information in your credit report can boost your chances of getting a loan with most private lenders. It could also help you score a lower rate of interest.
- Enrollment status: Most lenders will only approve your loan application if you’re enrolled in an accredited educational institution. In addition, some may also require you to attend at least half time.
- Age: You must have reached the age of legal adulthood to take a loan on your own. In most states, this is 18 years. If you haven’t reached the age of adulthood in your state, you will need to apply with a cosigner.
- Steady income: The lender will want to see that you or your cosigner is earning a steady income and can afford to repay the loan.
You could get declined for a private student loan if you don’t meet the lender’s criteria. Bad credit or limited credit history are typically two of the most common reasons students get declined for private loans. One way to overcome this obstacle is by applying with a qualified cosigner.
How To Apply For A Private Student Loan
Step 1: Research and compare loan options – Research lenders and compare interest rates, borrowing limits, administration fees, repayment plans, and monthly payments. Also check if you can apply with a cosigner and look for any special features or benefits associated with the loan.
Step 2: Check your eligibility – No matter how good the terms and conditions of a loan, it’s no good for you if you don’t qualify. Make sure you meet the requirements of all the loans on your shortlist.
Step 3: Get the required information and documents ready – You will need to submit your personal, academic, and financial information along with your loan application. Keep your Social Security number, birth date, email and home address, bank statements, tax returns, and school details ready in advance.
Step 4: Submit your application – Once you’ve selected the lender, fill out the application and submit it along with all the required documents.
The lender will then review your application, contact your school to verify your attendance, and process the loan if you meet all the requirements. The funds will be disbursed directly to your school.
Interest Rate on Private Student Loans
There is no standard interest rate for all private student loans across the board. You will have to get in touch with each lender to find out their rate of interest and other policies regarding the loan amount, administration fees and repayment terms.
When taking private student loans, you will have to decide between fixed and variable interest rates. If you choose fixed rate, the interest on the loan remains unchanged over the course of the loan’s life. This results in a steady monthly payment without the rate ever increasing or decreasing over the life of the loan. You can only change the rate when you refinance the loan.
In comparison, variable rates can fluctuate during the term of the loan. This results in less predictability for monthly payments. Variable rate loans could be a good option if you think you’ll be able to pay off your loans earlier rather than later.
How To Get A Private Student Loan With Thin Or Non-Existent Credit History
Most college students would not yet have had the opportunity to build their credit history. If you have thin or non-existent credit history, you may need to apply with a qualified cosigner. Having a cosigner can also help you get a higher loan limit and a lower rate of interest. A cosigner can be a parent, relative, guardian, spouse, or even a friend.
Cosigning is a loan is a huge responsibility. Should you default on your loan, your cosigner will be held responsible for paying your outstanding dues. Their responsibility ends only when the loan is fully paid up or if you apply for a cosigner release.
Paying Back Private Student Loans
Most private lenders will allow you to defer payments while you’re still in college and until six months after you graduate. This means you will have to start making monthly loan payments six months after your graduation date. The repayment term on private student loans depends on the amount borrowed and the lender’s policies. It could be anywhere between 5 to 25 years.
Late or missed payments on your private student loans can damage your credit. You will also incur a late fee payment and interest on the outstanding until it is paid. If you applied for the loan with a cosigner and you miss a payment, your cosigner’s credit could endure damaged credit as well. It’s a good idea to set recurring reminders for the various due dates to minimize the risks of delayed or missed payments.
Your credit report will have all of your private student loan details, including how much you owe.
Are you looking for student loans? Use College Raptor’s Student Loan Finder to discover personalized loans. Compare lenders and interest rates to find the ideal student loan for you!
| Lender | Rates (APR) | Eligibility | |
|---|---|---|---|
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5.34%-15.96%* Variable
3.99%-15.61%* Fixed
|
Undergraduate and Graduate
|
VISIT CITIZENS |
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4.92% - 15.08% Variable
3.99% - 15.49% Fixed
|
Undergraduate and Graduate
|
VISIT SALLIE MAE |
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4.50% - 17.99% Variable
3.49% - 17.99% Fixed
|
Undergraduate and Graduate
|
VISIT CREDIBLE |
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6.00% - 13.75% Variable
3.99% - 13.75% Fixed
|
Undergraduate and Graduate
|
VISIT LENDKEY |
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5.50% - 14.56% Variable
3.69% - 14.41% Fixed
|
Undergraduate and Graduate
|
VISIT ASCENT |
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3.70% - 8.75% Fixed
|
Undergraduate and Graduate
|
VISIT ISL |
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4.99% - 16.85% Variable
3.47% - 16.49% Fixed
|
Undergraduate and Graduate
|
VISIT EARNEST |
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5.00% - 14.22% Variable
3.69% - 14.22% Fixed
|
Undergraduate and Graduate
|
VISIT ELFI |
