If you need to borrow money to afford college, you’re not alone. Today, more than 44 million people in the United States hold some form of student loan debt, and the total student loan debt balance nationwide hovers around $1.5 trillion.
The good news? There are plenty of student loan options available, so you can find the one that best suits your needs. And while Federal loans still make up the majority of student
loan debt in America, it is estimated that about 11% of today’s student loans come from private lenders.
Not sure whether a private student loan is right for you? By familiarizing yourself with this type of loan, you can make an informed decision regarding your higher education financing.
What is a Private Student Loan?
Unlike Federal student loans (which are backed by the United States government), private loans come from other lenders, such as banks and credit unions. Because they oftentimes don’t have a cap on the loan amount, students often turn to private loans to supplement their federal loans. Private loans also tend to have faster application processing and disbursement for students who need to borrow money quickly to cover their qualified educational expenses.
On the flip side, private loans typically have less forgiving repayment terms and options than Federal loans. They’re also subject to more stringent credit and eligibility requirements.
Important Components of a Private Student Loan
If you’re thinking about applying for a private student loan, there are some key things to be aware of.
Whereas interest rates on Federal loans are fixed, some private student loans have adjustable interest rates. This means that your rate could increase or decrease with market changes. Make sure you’re aware of what type of interest rate (fixed or adjustable) your loan will have and what your starting rate will be.
For fixed-rate loans, use a student loan interest calculator to figure out how much you’ll pay in interest over the life of your loan.
Loan Term/Repayment Conditions
The loan term refers to the total amount of time you’ll have to pay off your loan balance. This includes any grace period included with your loan (if applicable). Keep in mind that the longer your loan term, the smaller your monthly payments will likely be. However, it will take you longer to pay it off. Additionally, you’ll generally pay more in total interest on a loan with a longer term than you would with a shorter term.
Private lenders don’t tend to be as generous when it comes to forbearance and/or deferment options. Some private lenders require you to pay at least some of your loan back while you’re still in school. Others may offer a deferment period while you’re still in school (or even until a few months after you graduate). If you do have a deferment period with your private lender, make sure you understand whether your loan is still accumulating interest; in many cases, interest continues to add up regardless even if you’re paying back some of the loans while you’re in school.
If this is the case, you may wish to at least pay off your interest balance as it accumulates. Otherwise, it may capitalize after a certain period and be added to the total balance of your loans.
Forbearance (or deferring payments due to financial hardship) is also less common with private lenders than it is with federal options. While you may be able to negotiate something with your lender if needed, forbearance typically isn’t guaranteed with a private loan. This means you could default on your loan if you’re not careful.
Key Questions to Ask a Private Lender
One of the nice things about private loans is that you can really “shop around” for a lender. As you begin exploring your options, there are a few key questions worth having answered.
What if I decide to go to graduate school?
If you’re looking into private student loans that offer deferment and are thinking about going to graduate school down the road, find out how your deferment may be affected. Some private student loan lenders allow deferment for as long as you’re enrolled in school. Others cap deferment as soon as you finish your undergraduate degree.
How can I secure your lowest interest rate?
Don’t be afraid to ask about the lender’s absolute lowest interest rate available and how to obtain it. You may need to have a specific credit score minimum (or a cosigner with great credit). You may have to agree to a shorter repayment term. Finally, if you agree to have payments automatically debited from your checking account, many lenders will provide an additional rate reduction.
How and when will funds be disbursed?
Private lenders can vary in their disbursement of funds. Some will automatically disburse your money to your school, where the balance will be credited to your student account. Others may send you a check directly. Find out exactly what to expect in terms of disbursement and when you’ll receive your funds. This way you can plan accordingly—especially if you’re relying on the money to buy textbooks or other supplies.
Additional Tips for Finding Your Best Private Loan
Before you start filling out private student loan applications, there are a few last things worth checking.
Know Where Your Credit Stands
Start by checking your credit score and reviewing a copy of your credit report. You can obtain a free copy of your credit report once a year from any of the three reporting bureaus. Be sure to report/dispute any errors on your report, as these can affect your credit. This can, in turn, make it harder to qualify for private student loans.
If your credit is poor or if you don’t have established credit history, consider finding a cosigner to help you secure a lower interest rate.
Take Advantage of Discounts
Some private student loan lenders offer discounts for borrowers who maintain a certain GPA or schedule automatic payments. Explore your discount options and take advantage of all that apply to you.
Navigating the world of private student loans can be overwhelming at first, but with a little research and planning, you’ll be well on your way to securing the best loan for you. Private loans are never one-size-fits-all, but by knowing your specific needs and priorities, you can apply for a private loan with confidence.