When it's time to decide how to finance your education, you have several options and programs to apply to. Grants and scholarships will help you the most in the long run due to the fact that they don't have to be repaid. If you're still looking for sources of financing after you've exhausted your scholarship and grants options, most students turn to private student loans as their next option, which are loans offered by credit unions, online banks and other private lenders.
Just like federal student loans, private student loans can be used to pay for college tuition and living expenses associated with going to school, but the difference is that the originator is not the federal government.
Private loans should be used to cover any gaps to finance your education once you've exhausted your federal loan options. It's typically in a borrowers best interest to start off with federal student loans, mostly due to the fact that for federal student loans, you can benefit from various programs like income-driven repayment options and forgiveness programs, and you don't need to disclose your credit history and don't need a cosigner.
Private loans, which are heavily advertised, do not have the forbearance and deferral options available with federal loans (which are never advertised). In contrast with federal subsidized loans, interest accrues while the student is in college, although repayment may not begin until after graduation. While unsubsidized federal loans do have interest charges while the student is studying, private student loan rates are often higher, sometimes much higher. Fees vary greatly, and legal cases have reported collection charges reaching 50% of amount of the loan.citation needed Since 2011, most private student loans are offered with zero fees, effectively rolling the fees into the interest rates.
Can I qualify for a private student loan?
In order to qualify for a private student loan, most lenders and servicers will usually be on the look out for several key requirements, such as a solid credit score or a cosigner with a better credit rating than the borrower, and a steady income. If you don't have a steady income, you could also have a cosigner for the loan who has one.
If your potential loan lender doesn't require a cosigner, you'll probably end up paying higher interest throughout the life of the loan. For many students who are still undergraduates, they'll most likely need a cosigner with higher income in order to qualify for a private student loan.
How much can I typically borrow with a private student loan?
Unlike federal student loans, private student loans don't have the same stringent borrowing limits. Your borrowing limits for federal student loans depend on the degree you're pursuing. If you are a student pursuing their undergraduate studies, the maximum amount that you can borrow each year in Direct Subsidized Loans and Direct Unsubsidized Loans ranges from $5,500 to $12,500 per year, which depends on what year you are in school as well as your dependency status.
For graduate or professional students, you have higher borrowing limits due to the fact that you're most likely bringing in more income during the time you are attending school or in your future job. In this scenario, you can typically borrow up to $20,500 each year in Direct Unsubsidized Loans.
Many private lenders also set debt ceilings, and the limits for each servicer can vary. For example, some lenders can set six-figure lifetime borrowing limits for the student loan borrower while others may allow you to borrow up to a certain amount, such as $50,000 or $70,000 each year.
How long will it usually take for me to pay off my private student loans?
Your repayment term for your private student loan will vary based on your lender. Most lenders offer repayment terms ranging from 5 years to 25 years, and some could only offer repayment terms of 10 years or 15 years.
Similar to the six-month grace period that accompanies federal student loans, private student loan lenders also typically offer a similar window for a grace period after you finish school. Usually, during this grace period, your interest accrues so when you start paying your loans after the grace or deferment period, the deferred interest is added to your overall balance. This deferment option can really help you out if you're still looking for a job or may be relocating out of state for an opportunity and you'll have moving expenses to deal with as well.
Some private servicers may possibly require you to make small, fixed payments which go towards your interest balance while you're enrolled in your studies, so be sure to do your due diligence and shop around with many lenders to see which servicer can offer you the most flexible repayment terms for the lowest interest rate.
What type of interest rate should I expect if I go with a private loan lender?
Your interest rate for a federal student loan will be fixed throughout the term of the loan. This could hurt you if general market interest rates begin to slide, but it could be a good thing if interest rates rise and you are still paying what you were paying years ago on your loan.
Most private lenders offer you the choice to go with a variable interest rate as well as a fixed interest rate. The fixed rate will stay the same throughout the life of the loan until maturity, while the variable rate will change based on the reset period the private student loan lender sets, which could be quarterly or even as frequent as once a month.
Since private loan lenders incorporate individual borrower credit risk in their financial models to arrive at your quoted interest rate, many private loan rates are usually higher than their federal loan counterparts for similar repayment maturities. However, if you have a high source of income and a great credit score or even have a co-signer with high income and a great credit score, you could likely be quoted with a lower interest rate than if you went with a federal student loan. The private lenders financial models can also benefit your unique situation.
Additionally, private student loan interest rates will typically move faster than those offered by the federal government for private loans since private loan rates get reset once a year. Many private student loan servicers incorporate recent U.S. Treasury market movements into their credit risk models so if the Fed is lowering interest rates, private student loan rates could be lower than those for federal loans.
How can I apply for a private student loan?
A private student loan can be a great financing option for student borrowers that is ideally used in conjunction with federal student loans such as PLUS loans, Stafford loans and Perkins loans, as a supplementary loan vehicle to finance your higher education in the United States.
It's simple to apply for a private student loan as many banks and private lenders offer online applications which can take less than 20 minutes to complete (provided you've done your due diligence on the lender first). Make sure you shop around wit multiple different lenders before you submit an application to see who can offer you the best terms, and educate yourself on loan myths as well as on ways you can lower your interest rate throughout the repayment process.