Editor's choice: EDvestinU Private Student Loans
- Nonprofit lender
- Good for international students
- Autopay discounts
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Federal student loans have no shortage of perks. But there’s a limit to how much you can borrow and you might not be able to use them to pay for your entire education. That’s where private student loans come in.
Learn how private student loans are different from federal student loans, what it takes to qualify and how to apply so you can decide what’s best for your situation.
A private student loan is money you borrow from a private lender to pay for college expenses, including tuition, fees, room and board, books, travel and more. You can usually hold off on making repayments until after you graduate. When repayments begin, you typically pay off the loan over five to 20 years — plus interest and fees. Many private student loan providers also offer deferment and forbearance options to help with repayments if you hit a financial setback.
But unlike federal student loans, the interest rate you receive can be quite high, especially if you apply without a cosigner. Because of this, you should always compare the best student loan providers before you settle to ensure you’re getting a good rate and fair terms.
You might want to apply for a private student loan if:
Ask yourself the following questions when comparing private student loans:
If you’re an undergraduate, the answer is probably no — unless you have a creditworthy cosigner. To qualify for most private student loans, you or your cosigner must:
Since most college students don’t even have credit scores, let alone an income above minimum wage, you’ll have better luck qualifying if a family member or friend cosigns your loan. Check out our step-by-step guide to applying for a student loan with a cosigner to get started.
It’s possible to get a student loan with bad or no credit, but it’s not as easy if you want a private student loan. If you haven’t already, look at your federal options first. Most don’t even involve a credit check and even those that do are more concerned with past defaults, delinquencies and other negative marks on your credit report than your score. No matter which federal loan you get, you’ll get the same rate as everyone else, which is set by Congress.
Qualifying for a private student loan on your own is more tricky. Most require good credit to qualify and excellent credit to get the best rates. If you don’t have a credit score yet or your credit history is too short to be eligible, your best bet is borrowing with a cosigner. Even if you just make the cut-off, applying with a cosigner can be a wiser choice, since lower credit scores tend to get higher rates and less favorable terms. Even without a cosigner, you can explore the best student loans for bad credit using our guide. Some offer discounts and other incentives to help ease the cost of borrowing.
Just because you’re applying with a cosigner doesn’t mean you’re automatically in. Lenders prefer cosigners that have high incomes compared to their debt obligations, a long and strong credit history and a high credit score. The most common cosigner on student loans is a student’s parents or another relative.
Once you and your cosigner sign your loan documents, they’re legally on the hook for making repayments if you’re late or default. You might want to look for a lender that has a cosigner release option, especially if you have younger siblings that might need a cosigner on their student loans in the future. That way, you’ll be able to take your debt into your own hands once you have more financial stability.
While the application process can vary from lender to lender, many follow a similar process:
Don’t have time to compare lenders on your own? To cut down on the work of finding a private lender, some students prefer to use connection sites instead of doing the research themselves.
These typically ask you a few questions about where you’re going to school and how much you need to borrow before presenting you with several private lenders you might qualify for. Some also run a soft credit check on you and your cosigner and give estimates on potential rates, terms and monthly repayments.
These sites might save you time, but you generally won’t get the full picture of lenders that are out there. That’s because they make their money off of commission from lenders, who pay to have potential borrowers directed to their site. There’s a chance that there’s a lender out there that offers more competitive rates — perhaps a local nonprofit — that won’t show up in any of your searches.
But, if you’re short on time and research isn’t an option, a connection site could help you quickly scan potential rates and lenders so you can make a more informed choice than going with the first name that comes up on a search engine.
While private student loans come in higher amounts and have less limitations on schools, they can be harder to qualify for without a cosigner. And they don’t come with as many repayment options as federal loans. Weight the benefits and drawbacks before deciding whether a private student loan is right for you.
Two things might happen after you’re approved: You might receive the funds yourself to pay your educational expenses or, more commonly, your funds will go directly to your school. If your lender sends funds directly to your school, you might have to wait a few weeks to receive any extra funds to cover expenses besides tuition and fees.
Once your school receives funds from your private student loan, you might have to start making some kind of repayment right away. Typically, you’ll have a choice between full repayments, interest-only repayments or small fixed repayments that start around $25. You might also be able to defer your loans until after you drop below half-time, as you would with unsubsidized federal loans.
No matter which option you choose, your interest will start to accumulate as soon as your funds are disbursed. After you drop below half-time, you may have to start making full repayments immediately, though some lenders offer a six-month grace period.
Once you start making full repayments, your interest will capitalize, or be added to your loan’s principal. This can make your loan more expensive because the interest you pay is a percentage of your loan’s principal. You can avoid this by making interest-only repayments as soon as your loan is disbursed.
Typically your lender will only offer one standard repayment plan, though you might find some that offer graduated or income-based plans, which typically start out low. If you’re concerned you won’t be able to afford your standard repayments, reach out and ask about your options.
Most student loan providers offer deferment and forbearance for situations when you’re temporarily unable to pay off your student loans. You’ll typically need at least a year of on-time repayments and a legitimate reason to qualify — like going back to school.
Like with federal loans, private lenders typically use loan servicers to handle repayment. You’ll have to go through them, not your lender, if you need to make any changes to your repayment plan or apply for deferment or forbearance.
Private and federal student loans differ in two key ways: who qualifies and how repayments work.
As long as you attend a Title IV school, are a US citizen or meet certain residency requirements and make satisfactory academic progress, you’ll likely be eligible for federal student aid. With private student loans, creditworthiness is key. You’ll need excellent credit, a strong monthly income and long credit history to get the best rates. Most undergraduates have none of these, which is why it’s common to apply with a cosigner.
And while you might get a discount if you’re majoring in a more lucrative field, private lenders don’t usually care about your grades, run-ins with the law or anything else that doesn’t directly affect your ability to repay.
Repaying a private student loan is slightly different than a federal student loan. While you may still have deferment options, some lenders might require you to start making full or interest-only repayments while you’re in school.
In addition, private student loans typically don’t come with many repayment plans. Some offer income-based or graduated plans but most rely on the standard fixed monthly repayments, but it isn’t required. Your forbearance and deferment options are also more limited, and some lenders don’t offer these at all.
While a private student loan can be convenient, you should still read up on your student loan options to make sure you’re making the right financial decision for yourself and your future.
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