Private Student Loans
Paying for college is a major financial undertaking for students and families. When savings, scholarships, grants, federal student loans, and work-study aren’t enough, private student loans can help cover the gap. This comprehensive guide will explain what private student loans are, their pros and cons, how to qualify, the application process, and tips for getting the best rates and repayment terms.
What are Private Student Loans?
Private student loans are educational loans offered by banks, credit unions, state agencies, and other private lenders. They help students pay for college when federal loans and other aid are insufficient. Key attributes:
- Not issued or guaranteed by federal government
- Credit score driven
- Higher interest rates than federal loans
- Less flexibility in repayment plans
- Fewer borrower protections than federal loans
Private student loans fill the funding gap when federal direct loans, which have annual and aggregate limits, still leave unmet need. They require qualification based on creditworthiness and/or a cosigner.
While more expensive, private student loans provide financing access for thousands of students each year. However, federal direct loans should be maxed out first due to lower rates and stronger consumer protections. Private loans complement but don’t replace federal aid.
Pros and Cons of Private Student Loans
Private student loans offer both benefits and drawbacks to consider:
- Access to funding not limited by FAFSA or school aid package
- May offer larger loan amounts than federal limit
- Faster funding when payments directly to student, not school
- Builds credit history if repaid responsibly
- Deferred payments while in school full-time
- No prepayment penalties
- Credit check required, better credit means better rates
- Higher interest rates than federal loans
- No income-driven repayment options
- No loan forgiveness programs
- Less flexibility for deferment if facing hardship
- No option to discharge debt in bankruptcy
Private loans are a funding source of last resort given higher costs and lack of protections compared to federal loans. Exhaust all other options first. But when federal aid is maxed out, private loans can be a viable path for students with some credit history.
Types of Private Student Loans
Private student loans come in different forms:
- Certified by financial aid office
- Only for student’s cost of attendance
- Funds paid directly to school
- Borrowed directly without school certification
- Can receive loan money directly
- Can be used for other expenses besides tuition
Cosigned and Non-Cosigned Loans
- Non-cosigned only uses student’s credit qualifications
- Cosigned requires second person with better credit to sign
- Better terms often with cosigner
Fixed and Variable Rate Loans
- Fixed rate locked in for life of loan
- Variable rate adjusts along with market indices
- Fixed rate provides certainty but may be higher
Undergraduate and Graduate Loans
- Undergraduate loans for bachelor’s degrees
- Graduate loans for master’s, doctoral, professional degrees
- Graduate loans often have higher loan maximums
Choose loan type that aligns with your needs and qualifications. Understand all terms and implications before borrowing.
How Do Private Student Loans Work?
Private student loans operate differently than federal student loans in several key ways:
Private lenders evaluate borrowers’ credit score, income, debts, and ability to repay. Federal loans only consider financial need. Students with thin or poor credit history will likely require a creditworthy cosigner for approval.
School Certification Often Required
Many private lenders require the college financial aid office certify your cost of attendance before disbursing the loan. Others offer direct-to-consumer loans without school signoff.
Higher, Variable Interest Rates
Private loan rates vary by lender but average 7-13% for fixed rates and 3-12% for variable rates—higher than comparable federal rates. Qualified borrowers get better rates.
No Income Driven Repayment Options
Federal loans allow income based, graduated, and extended repayment plans. Private loans have fewer flexible repayment options overall. Payments are set by lenders.
No Forgiveness Options
Federal loans can be discharged in certain circumstances like permanent disability, school closure, or public service. Private loans only offer deferment and forbearance at lender discretion.
Can Go Into Collections
Federal loans rarely go into default due to flexible repayment options. Private loans can be sent to collections if you cannot make monthly payments, damaging your credit.
While more restrictive, private student loans offer an avenue to pay for college when federal loans are exhausted. But make sure you fully understand the limitations and responsibilities before borrowing.
What Are the Interest Rates on Private Student Loans?
Private student loan interest rates vary significantly between lenders and are based on prevailing market rates plus an added margin. Here are the key factors:
Creditworthiness – Borrowers with higher credit scores and lower debt-to-income ratios qualify for lower rates, while high-risk borrowers get higher rates, if approved at all. Cosigners with strong credit help secure better rates.
Loan Term – Longer loan repayment terms equal lower monthly payments but higher rates over the life of the loan. Shorter terms have higher monthly payments but less interest accrued over time.
Variable vs Fixed Rates – Variable interest rates adjust periodically with market indices and have lower initial rates but less predictability. Fixed rates don’t change but start higher.
Repayment Options – Enrolling in automatic payments and repayment during school can garner discounts of 0.25% or more on interest rate. Standard repayment has higher rates.
Aggregate Lending Relationship – Borrowers who have other accounts like checking or savings with the lender may get interest rate discounts.
On aggregate, current private student loan interest rates range from 3-13% but evaluating lender offers side by side is the only way to identify the truly lowest rates available to you.
What Fees Are Associated With Private Student Loans?
Beyond interest rates, some private student loans also charge fees that quickly add to costs:
Origination/Disbursement Fees – Upfront fee assessed at time loan is made, ranging from 0-10% of loan amount. Lower is better.
Late Payment Fees – Typically $25-50 if payment is more than 15 days past due. Some lenders provide grace periods.
Returned Payment Fees – Assessed if payment check bounces or payment is rejected, around $25-35 per infraction.
Deferment/Forbearance Fees – Charged if you postpone payments while in school or hardship. Not all lenders.
Early Repayment/Prepayment Fees – Uncommon but some variable rate loans charge this if paid off early.
Always read the fine print for any fees not disclosed upfront. Avoid loans with multiple fees that act as “gotchas” and increase the true cost. Upfront fees also reduce how much you actually get.
What Are the Loan Limits on Private Student Loans?
Private student loans have flexible loan limits since they are not bound by federal caps. Limits vary by:
Lender – Each private lender sets their own minimum and maximum loans amounts that often differ. Comparison shop to get the highest limits.
Degree – Undergraduate limits range $1,000 – $200,000. Graduate limits stretch higher from $5,000 – $350,000. Professional degrees tend to qualify for the highest limits.
Enrollment Status – Full-time students qualify for highest limits. Part-time and continuing education limits are lower. Must be enrolled at least half-time.
Expenses – Loans are capped at school certified cost of attendance. Budgets factor tuition, fees, living expenses, books, transportation, etc.
Year in School – Loan limits often increase each successive year as costs rise. Senior year limits can be double first year.
Loan Type – School certified loans must abide by financial aid budget. Direct-to-consumer loans can exceed it within lender max.
While limits are adjustable, borrow conservatively based on true need. Maxing out loan eligibility often leaves students overleveraged. Compare options to get limits that work for your situation.
How Much Should I Borrow in Private Student Loans?
Follow these best practices when determining how much to borrow:
- Estimate all college costs – Know exactly how much you need for the full degree. Divide by years to determine yearly need. Update this yearly.
- Max out federal direct loans first – Take full advantage of lower rate/higher protection government loans before tapping private loans.
- Don’t include living expenses unless essential – See if you can cover rent, food, transportation etc independently before adding them to needed loans.
- Only borrow what you absolutely require – Loan money runs out quick. Borrow the bare minimum to survive and supplement with income if possible.
- Have a plan to repay – Do the math and ensure your post-grad income will be enough to manage the monthly payments. Budget accordingly.
- Consider earning potential of your major – High income fields like engineering can justify more loans than lower income professions like social work.
- Use scholarships, income, savings – Exhaust all possible free aid, family support, income sources and savings before loans.
- Weigh ROI of college choice – More affordable state and community colleges often provide better “value” than high-cost private colleges if taking loans.
- Graduate on-time – Extra years in school mean thousands more in loan expenses. Stay on track.
Keep private borrowing to an essential minimum to avoid being repayment burdened after college. Prioritize graduating with the lowest debt possible.
How to Apply for Private Student Loans
Follow these steps to get private student loans:
1. Fill Out the FAFSA
Completing the Free Application for Federal Student Aid is required to qualify for federal loans and grants which should be exhausted first before private loans.
2. Identify Needed Loan Amount
Factor in tuition, fees, room and board, books, supplies, transportation, and other costs. Account for aid received.
3. Check Credit Score
Students and cosigners should verify credit scores as this will impact loan options and rates. Boost credit if needed.
4. Research Lenders
Compare private lenders like Sallie Mae, College Ave, Discover, Wells Fargo and local credit unions. Weigh interest rates, fees, eligibility, and loan amounts.
5. Apply to Multiple Lenders
Complete and submit applications with requested financial information. More applications means more choices. Application won’t affect your credit score.
6. Select Best Offer
Compare loan terms, rates, and fees across lenders and choose the most affordable option that covers your needed amount.
7. Complete Loan Agreement
Review terms, disclosures, and regulations thoroughly before signing your promissory note to finalize the loan.
8. Send School Certification
If required, forward documents to your school’s financial aid office to certify enrollment and requested loan amount.
9. Receive Funds
Once approved, loan funds will be sent to your school’s bursar office directly or into your bank account on disbursement date.
Always exhaust federal loans and grants first when borrowing for college. Compare private lender options side-by-side and understand all terms before acceptance.
Tips for Getting the Best Private Student Loan Terms
Follow these tips to get lower rates and optimum loan terms:
Start early – Apply at least 60-90 days before you need the funds to allow time to compare offers thoroughly.
Ask about discounts – Inquire with lenders about discounts for autopay, existing accounts, graduated repayment, cosigner release, etc.
Prioritize lowest rates – Weigh interest rate and fees most heavily as they have biggest dollar impact over loan’s life.
Compare multiple lenders – Contrast offers to find the best rate for your specific credit situation, not overall averages.
Consider local options – Local credit unions and state loan agencies may offer better terms and incentives than national lenders.
Improve credit – Correct errors on credit reports, lower credit utilization by paying down cards, and avoid new hard inquiries.
Apply with cosigner – Adding a cosigner with high credit score typically guarantees better rates.
Consider shorter terms – Long repayment terms mean more interest paid over life of loan. Find balance between rate and term.
Make payments in school – Making interest payments while in school can qualify you for discounts from some lenders.
Limit total borrowing – The more you borrow, the higher the monthly payment and overall interest costs. Keep loan totals lean.
Shopping around, maintaining good credit, considering a cosigner, and locking rates early ensures you get the lowest private loan costs.
Private Student Loan Repayment Options
Carefully review repayment terms when choosing a private student loan:
In School Interest Payments – Making interest payments while enrolled can prevent capitalization and balance growth.
Grace Period – Most lenders provide 6 months post-graduation before requiring payments. Interest still accrues.
Deferment – Allows postponing payments back to school, military, or other circumstances. Uncommon for private loans.
Forbearance – Lets you temporarily pause or reduce payments if facing financial hardship. Must apply and get approved.
Standard Repayment – Equal monthly payments for 10-15 years. Results in least interest paid.
Graduated Repayment – Payments start low and gradually increase over set time period, often 10 years.
Extended Repayment – Low fixed payments over longer 25 year term. Reduces monthly amounts but increases total interest.
Paying Ahead – Applying extra principal payments can reduce loan length and total interest costs. No prepayment penalties.
Having flexible repayment options provides needed breathing room following graduation. Compare repayment offerings when selecting your private student loan provider.
Private Student Loan Forgiveness Options
Private student loans lack the strong forgiveness and discharge options available for federal student loans:
Death – For parent borrowers taking loans for children, remaining balance may be forgiven if parent dies. Otherwise loans pass to estate.
Total Disability – Rare but some lenders forgive outstanding balance in cases of permanent disability. Very stringent criteria.
Bankruptcy – Nearly impossible to discharge education loans in bankruptcy except in cases of permanent disability.
Military Service – No direct forgiveness but special programs give deployed service members reduced interest rates on private loans.
Public Service Loan Forgiveness – Federal program is only for federal direct loans, not private. Teachers, firefighters, government workers etc. do not qualify.
School Closure – Federal loans can be forgiven if school shuts down while enrolled. No parallel discharge programs exist for private loans.
Deferment and Forbearance – You must apply and be approved for reduced/paused payments in hardship scenarios with private loans.
If you anticipate needing any type of loan forgiveness in the future, prioritize federal direct loans over private. Otherwise you have minimal options for relief with private loans.
Pros and Cons of Refinancing Private Student Loans
Here are advantages and disadvantages of refinancing private student loans:
- Lower interest rate saves money over loan’s life
- Consolidate multiple loans into one payment
- Flexible loan terms like lengthening maturity
- Removing cosigner from loan
- Qualify for better rate after initially denied
- Unemployment protection programs
- Lose borrower protections offered by some lenders
- New origination fees and costs
- Lengthening maturity increases interest paid over time
- Forfeit ability to pause payments if facing hardship
- Temporary rate discounts revert to higher rates
- Loss of relationship discounts with existing lender
In general, refinancing makes sense if you get >2% lower rate and can comfortably make the monthly payments. But carefully consider tradeoffs of refinancing vs keeping existing loans before moving forward.
Alternatives to Private Student Loans
Before resorting to expensive private student loans, exhaust all alternatives:
- Fill out the FAFSA to get grants, work-study, and max federal loans
- Apply for scholarships from schools, employers, non-profits, communities
- Attend a more affordable public in-state college
- Start at community college for gen ed credits then transfer to university
- Become a resident assistant (RA) for free room and board
- Participate in university clinical trials, studies or focus groups
- Get tuition reimbursement from your employer if going back to school
- Use 529 savings plans and Coverdell ESAs for school expenses
- Lower costs by graduating early through AP credits, summer classes
- Work part-time to help cover expenses and minimize loans
The best way to avoid heavy debt burdens is graduating college with minimal loans. Make use of all available financial aid, savings, income sources, and affordability strategies before tapping private student loans.
Is a Private Student Loan Right for You?
Private student loans can be a viable option for funding college when federal loans are maxed out. Consider if they make sense based on:
- Required loan amount exceeding federal loan limits
- Meeting eligibility requirements and qualifying for decent rate
- Having sufficient income after college to make payments
- Accepting higher, variable rates and fees
- Planning for limited forgiveness options
- Comparing alternatives like scholarships, savings, income
For families unable to fully pay tuition out of pocket, private student loans offer a way to bridge gaps in paying for college. But make sure you evaluate the costs and fine print before taking them on. Federal loans should always be prioritized first.
Paying for college is a financial balancing act for many families. Private student loans provide supplementary funding when savings, income, grants, and federal direct loans still leave unmet need.
Their higher cost and fewer consumer protections make them an option of last resort. But when handled responsibly, private student loans invest in your education and future earnings potential. Compare multiple lenders and offers to get the best possible rates and terms for your situation.