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What Is a Private Student Loan?


Blog Author ProfilePeppyWallet Editorial Team
Posted on August 18, 2019
PeppyWallet aims to help you make the best financial decisions when it's time to make them. In order to help maintain our platform and services, some or all of the products featured in this post are from our Product Partners. Our opinions however, are our own, and featuring specific products does not influence our analysis.
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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.



Here are some of the best refinance lenders


Lender
Variable APR
Earnest
2.14-6.79%1
CommonBond
2.41-7.95%2
LendKey
2.24-6.67%3

1Important Disclosures for Earnest

To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.

Earnest fixed rate loan rates range from 3.45% APR (with Auto Pay) to 7.49% APR (with Auto Pay). Variable rate loan rates range from 2.14% APR (with Auto Pay) to 6.79% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of September 5, 2019, and are subject to change based on market conditions and borrower eligibility.

Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.

The information provided on this page is updated as of 08/15/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at hello@earnest.com, or call 888-601-2801 for more information on our student loan refinance product.

© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.

2Important Disclosures for CommonBond

Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.37% effective July 10, 2019.

3Important Disclosures for LendKey

Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any education institution.


The team members at PeppyWallet pride themselves in finding and suggesting services and products that they believe are of high quality and have the potential to positively change a student loan borrower's financial circumstances. We may earn an advertising fee or sales commission when we recommend various services and products to you, which is how we maintain our site and education platform. Be sure to read the fine print to help you understand your product's or service's terms and conditions. PeppyWallet is not an investment advisor or lender, and is not involved in the investment or loan approval process, and does not make investment related or credit decisions. Any terms and rates which are listed on our website are our latest estimates but are subject to change at any time, and we cannot guarantee that they are up-to-date.