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How private student loans work and when to get them
Financing that comes through when federal student loans can't.
Federal student loans come with low interest rates, a variety of repayment options — not to mention the forgiveness programs. However, there is a maximum 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. Just compare your options carefully so you aren’t stuck with high interest payments after you graduate.
- Min. Credit Score Required: 675
- Min. Loan Amount: $1,000
- Max. Loan Amount: $200,000
- APR: 4.51% to 9.26%
- Nonprofit lender
- Funds for international students
- Cosigner release
Our top pick: EDvestinU Private Student Loans
Straightforward student loans for undergraduate and graduate students.
- Min. Credit Score Required: 675
- Min. Loan Amount: $1,000
- Max. Loan Amount: $200,000
- APR: 4.51% to 9.26%
- Requirements: 675 credit score, $30,000 annual income, US citizen or permanent resident, enrolled at least half time at a degree-granting school.
What are private student loans?
Private student loans are technically a type of personal loan. You borrow a fixed amounts of money to cover your educational expenses that you pay off over a predetermined period of time plus interest and fees, typically up to 100% of the cost of your education — including any fees, books or travel expenses.
In practice, they work more like a hybrid between personal loans and federal student loans. They often come with more deferment and forbearance options than personal loans and many have multiple repayment plans. 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.
Compare private student loan providers
How are private student loans different from federal student loans?
Private and federal student loans differ in two key ways: Who qualifies and how repayment works.
Who qualifies: Federal vs. private
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 your loans: Federal vs. private
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.
6 times you might consider private student loans
You might want to apply for a private student loan if:
- You’ve reached your federal limit. You can only borrow a certain amount each year and undergraduates can’t borrow more than $57,500 in federal student loans. Graduate limits are higher, though they vary by degree costs, and they can still not be enough to cover all costs.
- Your maximum eligibility period is up. Federal student loans only cover six years of an undergraduate degree — less if you’re going for your associate’s. If you’ve switched majors several times or are enrolled in a longer program like engineering, you might need to switch to private student loans for your last year.
- You’ve lost your federal eligibility. You can lose your federal loan eligibility several ways, such as getting poor grades or run-ins with the law.
- You’re an international student. You might not be able to qualify for a federal student loan at all if you don’t have the right kind of US visa, making applying for a private student loan with a cosigner your only choice when it comes to student loans.
- You have post-graduate expenses. Federal student loans can cover in-school educational expenses like housing and textbooks. But those in-between costs like bar preparation courses or relocating for a residency don’t qualify — you’ve graduated already. That’s where private loans can pick up the slack.
- You go to community college. It’s possible that your community college doesn’t offer federal loans because it isn’t a Title IV school. In that case, borrowing private may be your only student loan option.
How do I compare my options?
Ask yourself the following questions when comparing private student loans:
Do I qualify for a private student loan?
If you’re an undergraduate, the answer is probably no. To qualify for most private student loans you must:
- Be the age of majority in your state, usually 18
- Be a US citizen or permanent resident
- Have a good or excellent credit
- Have enough income to show you’re able to afford repayment
- Be enrolled at least half-time in an eligible program
- Have no judgments, delinquencies and bankruptcies
- Have no past student loan defaults
Most college students don’t even have credit scores, let alone an income above minimum wage. International students might have trouble meeting the residency requirement. Luckily, you can apply with a cosigner that meets your lender’s basic requirements.
Can I qualify with bad or no credit?
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.
How cosigners work with private student loans
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.
How do I apply for a private student loan?
While the application process can vary from lender to lender, many follow a similar process:
- Compare lenders. You can use our comparison table to get started on your search for a lender you can qualify for that offers the amount you need at competitive rates and terms.
- Get your documents. You typically need to provide proof of attendance and your financial aid to apply for a private student loan.
- Complete the application. If you apply online, this step generally takes no more than 30 minutes.
- Have your cosigner complete the application. Lenders often send cosigners a link to your application so they can complete it in their own time.
- Review and submit. Read over your answers to make sure everything is accurate.
- Go over your offer. If you’re qualified, your lender should send you an offer for rates and terms. Make sure it’s something you think you can afford to repay after graduation before signing the documents.
- Sign the loan documents. Make sure you and your cosigner understand the terms and conditions of what you’re signing on to.
- Wait for your school to receive the funds. Private student loan providers often work with the school to agree on a date to disburse the funds, usually around the first few weeks of the semester.
Applying through a marketplace or connection site
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.
Benefits and drawbacks to consider when applying
- Higher limits than federal loans. Most lenders will either cover all of your educational expenses or have much higher limits per degree than federal student loans.
- Covers post-graduate expenses. You can use private student loans to pay for education-related expenses that happen after school, like starting a medical residency.
- Cosigner option. Having a parent or relative cosign for you can help you meet eligibility requirements that you might not be able to on your own.
- Less limits on schools. While there will likely be some kind of limits on what institutions qualify, they might not be limited to Title IV schools.
- Relatively high interest rates. Federal student loans typically have lower interest rates than any private option out there, with private APRs sometimes double what you’d get with a federal loan.
- Repayment could start immediately. You might be on the hook for full repayments as soon as your school gets your funds — almost impossible to afford on your own when you’re a full-time student.
- Less repayment options. You might have to dig a bit to find a private lender that offers the repayment plan that fits the career curve you anticipate or can put your loans on pause in times of crisis.
- Not many perks. While lenders like SoFi might offer networking opportunities and benefits for borrowers who want to go back to school or start a business, private student loans typically pale in comparison to federal loans when it comes to benefits — most don’t have forgiveness programs.
I got a private student loan. What happens next?
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.
Repayment plans and other options
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.
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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