How to choose the best private student loans

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    If you have thoroughly exhausted all of the funding options available through the federal student loan program, maximized all your scholarship opportunities, and hit up your family (or other wealthy benefactors) for financial support, then it is probably time to look at private student loans.

    When exploring financial aid options, some students feel panicked by the idea of private student loans – perhaps due to the abundance of student loan horror stories circulating the internet. However, if a funding gap remains and the terms are reasonable, a private student loan can be a sensible choice to cover the expenses needed to complete your education.

    What are private student loans?

    Private student loans are offered by non-federal institutions, such as banks, credit unions, or online lenders. Like other types of student loans, the money from a private student loan can be used for college expenses, including tuition, board, and textbooks.

    What is the difference between private student loans and private education loans?

    Both terms refer to non-federal student loans offered by private lenders and can be used interchangeably.

    How do private student loans work?

    Before deciding whether you are eligible for a private education loan, private lenders require evidence of your financial details, such as credit score and income. The process is a lot like securing a credit card – institutions need to know your financial background and current circumstances to decide on the terms they can offer.

    Most applicants require a cosigner because students tend to have very little credit history. The cosigner needs to provide their financial details and guarantee the student will pay back the loan and the specified interest within the agreed time frame. If this doesn’t happen, the cosigner becomes responsible for the loan.

    Candidates applying for private student loans usually need to get pre-qualified first. This involves submitting the necessary information and waiting for quotes from various lenders.

    Once you have received the quotes, you can choose the best private loans and apply with these lenders by submitting your documents. Required papers typically include bank statements and evidence that you are enrolled in a degree program – at the very least part-time.

    KEY TAKEAWAY

    To get a private student loan, you need a good credit history. If you have a bad credit score or no credit history, a cosigner may be required. The first step is to submit your financial information and get pre-qualified.

    Are there private student loans for bad credit?

    For most federal student loan applications, there is no credit check, because these lenders are more concerned with financial need than a student’s ability to pay the loan back. With private student loans, a candidate’s credit history is extremely important. The likelihood that a student will be able to repay the loan is the most important factor considered during the approval process.

    If you have bad credit and need a private loan, there are typically 2 options available:

    1. Partner with a cosigner who has good credit. This usually means your parents, but could be anyone you know with good credit who agrees to guarantee the loan.
    2. Apply for a loan from one of the few lenders that don’t have any credit requirements. Note that due to the increased risk, the interest rates are much higher.

    Are there graduate private student loans?

    Private student loans are available to graduate school students as well as those studying undergraduate degrees. Submit evidence of the type of program you are enrolled in to prove your eligibility.

    Federal vs private student loans

    When considering student loans, the first step is always submitting the free application for federal student aid (FAFSA). Statistics show that 1 in 5 students pass up less expensive federal loans because they either believe it is easier to apply for private loans than to complete the FAFSA, or they are unaware of all the loan options. The table below shows some key differences between federal and private student loans.

    » Read: Are you eligible for student loan forgiveness?

    Federal student loans

    Allow for income-driven payment options

    May be eligible for loan forgiveness programs

    May be subsidized – meaning students do not pay interest while at school

    Private student loans

    Borrowers make the specified monthly repayments regardless of their current circumstances

    Ineligible for loan forgiveness programs

    Never subsidized – students pay interest while still in school

    Tips for choosing the best private student loans

    There are many private loans available to college students, so it is important to shop around. Lenders are required to keep their loan offers open for at least 30 days. This gives you time to compare the competition for the best deals, and to check that a private loan is the best option.

    » Read: Alternative ways to pay for college 

    When comparing the different offers, be sure to look out for the following details to make sure you are getting the best private student loan available.

    Check the average interest rate

    Interest rates on private loans for college students vary significantly. At the very least, check current interest rates and compare them to the rate that is being offered. It is not uncommon to find students who religiously keep to their student budget but have no idea what interest they will be required to pay post-graduation.

    Also check whether the interest rate is fixed or variable. If it is variable, what is the maximum percentage that it can reach? It is vital you know this figure, or you may be faced with a nasty surprise later.

    Know the private student loan repayment terms

    Repayment terms are a key factor to consider before accepting any loan offer. How long do you have to pay back the loan? (10 years, 15, 20?) Can the loan be deferred if you go to graduate school? Are forbearance privileges available if you are unable to secure employment? How often is the interest capitalized? (Once a year is pretty typical.)

    Do not sign anything unless you fully understand the repayment terms. If you are unsure, seek advice from someone with more financial experience who can explain the payment schedule obligations.

    What is interest capitalization?

    When you do not pay the interest on your loan, it is added to the total debt. You then pay interest on this new larger amount. This is known as capitalized interest.

    Investigate loan repayment benefits

    Some loans offer repayment benefits to borrowers who prove themselves reliable and do not miss repayments. For example, you may be offered a 1% capital reduction after 36 on-time payments. These types of reward schemes can greatly reduce the amount you need to repay.

    Beware of private student loans without a cosigner

    In the past, a cosigner was rarely required, but the education loan market has changed. You should count on having a cosigner in place before applying for a private education loan. If you have a cosigner, the lender usually gives you a better interest rate and reduced fees.

    Read the promissory note

    Your eyes may glaze over when you receive the promissory note, but this is a legally binding document and you need to make sure you are not committing yourself to more than you thought. Become an expert in the agreement you are entering into. Understand all the details, particularly when it comes to loan refinancing options.

    KEY TAKEAWAY

    Before accepting a private student loan offer, make sure that the interest rate is in line with the current average. If you don’t have a cosigner, check whether this contributes to a higher interest rate. Before you sign anything, understand the contents of the promissory note and the repayment terms.

    Concluding thoughts on private student loans

    A private student loan doesn’t have to be something to fear, so long as you do your due diligence and understand exactly what you are signing up for. If you are still unsure of the impact a private student loan might have on your finances, put your mind at rest by calculating the earning potential of your degree. This allows for a high-level projection of what your future finances might look like and can help you determine the impact more borrowing might have.

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