Private Student Loans
What are private student loans?
Private student loans work differently than federal loans. Federal student loans are issued and guaranteed by the Department of Education. Interest rates for federal student loans are also set by the government every year and are the same for every borrower – your credit score is not considered when applying for federal student loans. Instead, you apply by submitting a FAFSA form, which the DOE uses to determine how much you need to borrow.
Private loans are not issued by the federal government. Instead, they’re funded by banks, credit unions, and other types of lenders. This means that in order to get a private student loan, you need to apply to each individual lender.
Private lenders will then take a look at your credit score, job history, and other important factors when deciding whether or not you’re approved. If you are approved, the interest rate and terms of the loan are decided based on these personal details.
Private student loan interest rates and terms:
As mentioned, interest rates on private student loans are set by individual lenders based on each applicant’s financial situation. That means private loan rates range quite a bit.
One important thing to know, though, is that private lenders can offer fixed or variable interest rates. A fixed interest rate means the rate never changes and your monthly payments will always be the same amount. Fixed rates are usually the best option since there are never any surprises when it comes to your payments.
With a variable-rate loan, the interest rate is tied to the market and can fluctuate up or down. Usually, variable-rate loans start out with a much lower interest rate that has the potential to increase later – meaning your monthly payment can change and you might end up paying more in interest over the life of the loan.
Private lenders also offer a variety of repayment terms. You can choose a short repayment term of 10 years or less in order to get out of debt fast (but your monthly payments might be pretty high). Or you can opt for a longer term of 15 years, 20 years, or even longer. A lengthy repayment period helps to keep monthly payments lower, but you’ll spend more on interest.
Again, the exact terms of your loan will depend on your creditworthiness and what your lender offers. We recommend applying to several private lenders to find your ideal interest rate and term.
Are there any drawbacks to private loans?
Although private student loans can be helpful tools for covering the cost of college, they’re not without some drawbacks.
Because these loans are offered by private lenders rather than the federal government, they don’t come with the same benefits as federal student loans. For instance, you can’t go on an income-driven repayment plan such as Income-Based Repayment or PAYE if your payments are too high. You also can’t apply for deferment or forbearance if you run into a financial emergency and need to pause payments. And federal forgiveness programs such as Public Service Loan Forgiveness also don’t apply to private student loans.
Some private lenders do offer help if you can’t afford payments, but it depends on the particular company you’re working with. So, if you need to take out loans to pay for school, it’s best to use all your federal options first.
How can I qualify for a private student loan?
Most private lenders base their approval process on your credit history and income. A low credit score or no credit history can make it tough to qualify for most private loans.
In this case, getting a cosigner can help; a trusted family member or friend with good credit can cosign your loan to increase the chances of your approval. However, it’s still your responsibility to repay the loan and there are serious consequences for late or missed payments. In fact, failing to repay your student loan doesn’t just hurt your finances – it impacts your cosigner’s credit, too.
The best way to make sure you qualify for a private student loan is to check your credit ahead of time and take steps to improve it if necessary. Having good credit when you apply not only means you’re less likely to need a cosigner, but you’ll get the best interest rates, too. That means less money out of your pocket to cover the cost of school.
If you’re ready to apply for a private student loan, compare our recommended lenders in the table above. You can apply to several lenders and see which one offers the best rates and terms.
If you want to learn more about private student loans, check out the resources below: