Takeaways
- Private student loans can serve as supplemental funding for educational expenses.
- Private student loans are issued by banks, credit unions, and online lenders.
- Private student loans have higher interest rates than federal student loans.
- Borrowing limits vary depending on the lender and your creditworthiness.
- Private student loans often carry co-signers because of high credit score standards.
What is a Private Student Loan?
A private student loan is given to current and prospective students to help them cover the costs of attending higher education programs like college or graduate school. Most students and families use private lenders to help cover educational expenses not met by scholarships, grants, or federal student loans.
The first stop in the journey to borrowing money for education is usually to apply for federal student loans. Start the process by submitting a Free Application for Federal Student Aid (FAFSA). Private student loan lenders generally do not require a completed FAFSA, but finishing the application could help the process. Another benefit is that you can secure federal student loans first and use private student loans to augment your total cost of attendance.
How to Secure a Private Student Loan?
Unlike federal loans, which the government backs, banks, credit unions, and online lenders offer personal student loans. Because they are issued by private institutions, private student loans have higher qualification standards than federal student loans.
Private student loan lenders look for applications with:
- High Credit Scores: Private student loan lenders require a high credit score to receive good terms. While the necessary credit score varies, lenders look for applicants with credit scores in the high 600s or above.
- Reliable Income: Lenders prefer borrowers who can start to pay back their student loans quickly. This means if you have a high income, you are more likely to receive better terms.
- Strong Co-Signers: Most college and graduate students don’t have the credit history or reliable income stream to secure private student loans. That is where co-signers come into the scene. Co-signers (like parents and family members) can help augment your education by signing the loan with you. This is usually done based on the understanding you will begin loan repayment to become debt-free after graduation
How to Apply for a Private Student Loan
Applying for a private student loan typically involves several steps. The first step is to research lenders and compare terms and conditions. The next step is to complete a loan application, which may require information about your enrollment status and total cost of attendance. Additionally, you will need to submit information about your financial history. During this step, private student loan lenders conduct a credit check. If you do not qualify based on your credit score, you might need to get a co-signer to qualify.
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4 Terms for Private Student Loans
Securing a private student loan involves navigating a series of steps tailored to ensure borrowers are well-informed and positioned to manage their educational finances effectively. Understanding key terms associated with private student loans is essential for borrowers new to the process. Here are critical terms to understand:
1. Interest Rate
The interest rate is a critical component of private student loans, representing the percentage the lender charges for borrowing the principal amount. Typically expressed as an annual percentage rate (APR), the interest rate directly impacts the total cost of borrowing and the affordability of loan payments over time. Higher interest rates mean your total cost of borrowing increases. Private student loans may have fixed or variable interest rates.
Note: Private student loans have higher interest rates than federal student loans. Interest rates vary from 6% to 14% for private student loans and 5.5% to 8.05% for federal student loans (rates vary based on the lender and fixed vs. variable interest rates) [1].
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2. Co-signer
As part of the application review process, lenders often conduct a credit check to evaluate your financial history and determine your eligibility for the loan. A strong credit score can enhance your chances of approval and qualify you for more favorable loan terms, such as lower interest rates. You could face challenges securing a private student loan if you have limited or poor credit.
If this sounds like you, get a co-signer to bolster your application. A co-signer, typically a parent, guardian, or trusted relative, agrees to share responsibility for the loan and repay the debt if the primary borrower defaults. Co-signers with robust credit histories and stable financial backgrounds can strengthen your application and potentially secure more favorable loan terms.
Note: Co-signers can boost your chances of getting the funding necessary to attend college or graduate school. Make sure you set clear expectations with your co-signer.
3. Repayment Term
Repayment terms for private student loans can vary considerably, ranging from a few years to several decades. Shorter repayment terms typically result in higher monthly payments but lower overall interest costs as borrowers pay off the debt more quickly. On the other hand, longer repayment terms may lead to lower monthly payments but higher total interest expenses over the life of the loan.
Note: The standard repayment term for private loans is 10 years, which aligns with the typical term for federal student loans.
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4. Origination Fee
An origination fee is a one-time fee charged by the lender for processing your loan application and disbursing funds. Origination fees are subtracted from the total loan amount before funds are sent to the borrower. By conducting comprehensive research, completing the application diligently, and exploring options such as co-signers, borrowers can position themselves for success in securing the necessary funding to pursue their educational aspirations.
Note: Compare the best private loan lenders to see who gives you the best interest rate, lowest fees, and necessary funding.
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How Private Loans Differ from Federal Loans
Private student loans often have terms and conditions that are different from federal student loans. Here are some typical features:
Variable Interest Rates
Unlike federal loans, which typically have fixed interest rates, private student loans may offer variable rates that fluctuate over time based on market conditions. You should know the potential for rate increases and factor this into your repayment plans.
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Credit Requirements
Private lenders assess your credit history and financial situation when determining eligibility for a loan. Borrowers with higher credit scores are more likely to qualify for lower interest rates and better loan terms.
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Co-signer Options
Many private lenders allow borrowers to apply with a co-signer, which can improve their chances of approval and secure more favorable loan terms. Co-signers are typically required when the primary borrower has limited credit history or income.
Repayment Options
Private student loans may offer various repayment plans, including standard, graduated, and income-based options. Borrowers should review each plan's terms carefully and choose the one that best fits their financial situation and goals.
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What are the Borrowing Limits?
Borrowing limits for private student loans vary depending on the lender, your creditworthiness, and the cost of attendance at the educational institution. In general, private lenders may allow borrowers to borrow up to the total cost of attendance minus any federal financial aid received. Here are the annual federal student loan limits:
Annual Aggregate Federal Student Loan Limits [2]
- $57,500 for undergraduates
- $138,500 for graduate or professional students
Financial advisors generally recommend only borrowing money you think you will need. Borrowing excess funds could impact your debt-to-income ratio once you graduate college and affect your ability to buy a house or get a mortgage.
Can You Refinance a Private Student Loan?
Refinancing a private student loan involves replacing an existing loan with a new loan. You refinance your student loan for better terms and a lower interest rate. You can choose to refinance your loan for lower monthly payments, reduced total interest over the life of the loan, or consolidate multiple loans into a single loan for easier payment management.
When refinancing a private student loan, you should consider the new interest rate, repayment term, and any fees associated with the refinance. Analyze your current financial situation and creditworthiness to determine if refinancing is the right option. One effective strategy is to proactively reduce your credit utilization and increase your credit score before trying to refinance.
Smart Summary
Private student loans can be critical for prospective and current students pursuing higher education. However, before deciding how much to borrow, you should carefully consider the terms and conditions of the loans, including interest rates, repayment options, and borrowing limits. Explore all available options – including federal student loans – to make an informed decision that aligns with your financial goals and educational aspirations
(1) Federal Student Aid. Parent Plus Loans. Last Accessed March 8, 2024.
(2) Federal Student Aid. Subsidized and Unsubsidized Loans. Last Accessed March 8, 2024.
