Getting Started With Private Student Loans
Private student loans are a type of unsecured loan you can use to pay for part of or all of your college education. These loans are offered through private lenders and are available to undergraduate, graduate, and professional-level students and those who attend vocational school.
Like federal loans, borrowers can use private loans to help pay for things like tuition, room and board, books, and school administration costs. The amount a person can borrow depends on factors like credit score, income, enrollment status, and the college program.
Around 7.61% of all student loans are private. Most people take out these loans because they don’t receive enough federal funding or the program is not eligible for federal loans.
Since they’re private, these alternative student loans come with some risks. For one, defaulting on payments will hurt your credit score. For another, these loans are usually ineligible for student loan forgiveness, deferment, or forbearance.
Top 3 online private student loan companies
How Do I Choose the Best Private Student Loan?
The easiest way to start is by comparing different lenders.
Every lender will have its loan terms, interest rates, fees, and eligibility requirements. Some only offer certain types of loans, such as undergraduate, graduate, or professional. Others may charge origination fees or prepayment penalties. Moreover, some lenders offer loans with fixed or variable interest, which can affect how much you pay over time.
Next, check to see if you qualify.
Most private lenders require borrowers to have a 670+ FICO score and a verifiable source of income or a cosigner. Some lenders offer prequalification (a process that includes a soft credit check), so you can get an idea of what you qualify for without affecting your credit. The prequalification process may be helpful if you’re considering several different loan options.
Also, see if the lender offers any special or unique features. For example, some have loyalty discounts with consistent on-time payments or reduced APR with autopay. Others offer unemployment protection or flexible repayment plans to prevent borrowers from defaulting on the loan. A few private lenders offer forbearance or deferment periods in case of financial, family, or health-related emergencies.
Before applying for any private loan, see what people say about the prospect lender on sites like the Better Business Bureau (BBB). This can give you an idea of how transparent or trustworthy the lender is.
Private Loan Types
- Undergraduate student loans: These private loans for college typically have a maximum borrowing limit of between $80,000 and $120,000. These loans usually have fixed APR and a standard repayment period of 5 to 15 years. Along with graduate loans, these are the most common type of private student loans.
- Graduate or professional school loans: Some lenders offer loans specifically designed for those attending a graduate or professional school program like law or business. Since these programs tend to cost more than undergraduate programs, these private loans often have higher loan limits. Borrowers usually start making payments while in school unless the program requires a residency. In either case, these loans will still gain interest as soon as the funds are disbursed.
- Community college or technical training: There are alternative student loans available to borrowers attending community college, technical training school, vocational college, or other nontraditional schools. Federal loans usually cover the full cost of these programs, but private loans can cover any financial gap. These loans come with variable or fixed interest and different repayment plans.
- Parent loans: Sometimes, a parent will take out a private loan on the student’s behalf. These loans are in the parent’s name, so they assume full responsibility for the loan and any interest. Unlike federal parent PLUS loans, most private loans don’t come with other fees beyond what’s written in the terms of the loan agreement. Depending on the parent's credit score, they also often come with lower interest rates.
An alternative to private loans is an income-share agreement (ISA). With an ISA, the lender agrees to fund part of the borrower’s college education in exchange for a percentage of their future salary. This agreement continues until the loan is repaid in full.
ISAs often come with a higher interest rate than traditional loans. Depending on the borrower’s earnings, payments can fluctuate quite a bit.
How are Student Loan Interest Rates Determined?
Every spring, Congress determines the new interest rates on federal student loans based on a special formula. This formula is based on 10-year Treasury notes and a slight, fixed percentage increase.
Congress also sets a cap on student loan interest rates based on loan type. Typically, undergraduate students pay the least amount in interest, while graduate students and parent borrowers pay the most.
Private lenders usually base student loan rates on the borrower’s credit scores, income, loan terms, and current market trends. As with federal loans, the interest rate increases for graduate, professional, and parent loans.
Refinance student loans
Private
Federal
Federal Student Loans VS Private Student Loans
Federal student loans are backed by the government, so they’re highly regulated when it comes to their terms, conditions, and interest rates. These loans typically come with fixed interest rates and flexible or income-driven repayment plans. They’re also sometimes eligible for student loan forgiveness programs.
The four types of federal loans are:
- Direct unsubsidized federal loans
- Direct subsidized federal loans
- Direct PLUS loans
- Direct consolidation loans
Private student loans, meanwhile, are available through private financial institutions and organizations. Since each lender sets its own terms and interest rates based on the borrower’s credit score and loan type, these loans are often more expensive than federal ones. But, if the borrower has excellent credit, they might qualify for a lower interest rate than with a federal student loan.
There are many types of private loans for college, including refinanced loans, undergraduate, graduate, parent, and career loans. There are also degree-specific loans, income-share agreements, and international student loans.
Most private loans are not eligible for student forgiveness programs. They also usually have stricter repayment plans. Usually, the borrower has to start making payments while still in school. The borrower is also responsible for any interest that accrues.
Can I Get a Private Student Loan with Bad Credit?
The short answer is yes. Nevertheless, it depends on the lender. You’ll need a 670+ credit score to qualify for a private loan in most cases. However, lenders also consider factors like income and debt-to-income ratio when deciding a borrower’s eligibility.
Some private lenders do offer loans specifically to those with bad credit. However, these loans typically come with higher interest rates and lower maximums.
One way to get around this is with a cosigner who will take responsibility for the loan if you are unable to make payments. The cosigner will need to have good credit and meet any other eligibility requirements.
Conclusion
A private student loan is one way for higher education students to fund their studies. Their repayment terms and rates may differ depending on the type and the student’s social-economic background. Regardless of whether private or federal, any student loan is a commitment. Many students find it a smart idea to create a solid repayment plan before engaging in one. That way, you won’t risk damaging your credit score or falling into unwanted debt.
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