Are private student loans right for you? We hope to help educate you to decide if a private student loan is right for you. Knowledge is power and we hope to help educate you. College is one of the best decisions you can make for your future. Expenses and tuition are both extremely important to consider, but the benefits of having a degree will be well worth the cost and demanding work. There are many ways to get financial aid, such as from your school, your family, private institutions, and the government. Another option to add to the list is private student loans. While there are numerous options out there for free and “cheap” money, most families are still left with an unmet need, money to pay out of pocket. Most families find that they don’t have the money saved to pay these costs. College isn’t getting cheaper; in fact most tuitions rise each year outpacing both inflation rates and savings rates. Private student loans can help cover the total cost of attendance or costs still left over after other forms of aid have been applied. With numerous types of financial aid out there, it can be hard to know which one works best for you. A good rule of thumb is to get as much free money as possible in grants and scholarship. Please see our scholarship articles and free scholarship tool to learn more about scholarships. Grants are usually a result of the FAFSA, please see our articles on the FAFSA. Then most students use Federal loans. Private student loans are typically used to bridge the gap between other financial resources and the total cost of attendance (COA). Private student loans are just how they sound-- they are offered by private institutions. These lenders can include credit unions, national banks, or online lenders. Private loans are a very common method of financial aid. Not many people can pay for school and all the expenses out of pocket, so private student loans can be a smart choice for you and your family. Most people apply for private student loans after they have applied for federal loans. This is because the federal government has loan limits in place and these limits usually do not cover the full cost of attendance. These federal limits are decided by the government and have not kept up with the cost of education. It is extremely important to be educated and responsible when looking into a student loan. You should not just look at the loan Tips: Federal loans charge an origination fee, most private lenders do not. Spend some time and compare the fees, rates and benefits. You MAY be able to get a lower cost loan from a private lender. Look at the total cost of the loan and what your payments will be after you graduate. 4-5 years of interest accrual will increase your payments. BORROW RESPONSIBLE – Will you be able to make the payments after you graduate? How do you qualify for a private loan? So, what do you need to get a private loan? Each lender has their own criteria, but in general most look at similar criteria to manage risk and decide who to lend to. Well, it may be hard to qualify for a private student loan on your own. Check your eligibility: Before you apply for a private loan, make sure you are eligible: Enrollment: You must be enrolled as at least half time at an eligible school. If you are enrolled less than half time, you may not be eligible. Your school may not be eligible. Most lenders do not lend to for-profit schools. Income and debt to income levels: There are certain income requirements that must be met and specific debt-to-income ratios. Credit: Lenders usually look for 3 open trade lines, length of the history and a credit score. You will need to have a good credit score to qualify. Most students do NOT have the credit history or score to get approved on their own. Do not be surprised if you are not approved on your own and must add a cosigner Since private loans are credit based and most college age students have little or poor credit, you may need your parent or credit worthy individual as a cosigner. Their credit can help you in qualifying and getting approved for the loan. If your co-signer has good credit, you may also be eligible for a lower interest rate. This is because good credit creates trust with your lender that you will be able to pay back the loan. However, make sure your co-signer is well informed on what exactly they are signing onto. Cosigners are equally responsible for the loan. Many people think they are secondarily responsible, but that is not true. If you are late on a payment, it will affect both of your credit histories and scores. Tips: Always apply with a credit worthy cosigner. The better their credit, the lower the rate. The cosigner does NOT have to be a parent. Borrow responsible - Only borrow what you need. It may be tempting to borrow as much as possible. But you will need to pay it back with interest. What is the application process for a private loan? You can usually apply online and get a decision in a few minutes. The application usually takes a few minutes and having your cosigner ready to apply can help speed the process. There are a few things you will need to apply for a private loan. The first step is eligibility. Eligibility is determined by income, credit, enrollment and more. Later, you will usually need to provide required documentation to prove: You and your cosigners ID. Proof of income., usually the last two pay stubs. The faster you get these to your lender, the faster your loan will get approved. Have the required personal and financial documentation prepared to make applying easier. Each lender has a different process, with some online applications getting results back in minutes. Others may require further documentation before your application is complete. School Certification: After approving your application, your lender will contact your school about the amount you requested and verification of your eligibility and enrollment status. This can be the longest part of the application process as some schools can take more than a month to respond. You can check in with your school to insure they do not need anything from you. Some schools will want confirmation from you on the amount being borrowed and that you want the loan. Check your account on your lender’s online portal. Many times, they may need something from you or your cosigner or need you to sign online documents. Disbursement: Private loans will be sent directly to your school, it is the school who sets your disbursement dates. If the amount of your loan exceeds the costs you need in a semester, you will be sent a refund for the extra amount. This will come from your school, not the lender and can take a few weeks. So, plan ahead you may need some short-term cash until you receive your refund. Tips: You will need to decide on your interest rate type, and your repayment plan. Take some time and think about this and speak to your cosigner. This can make a dramatic difference in your payment amount. Shop around. You can apply to multiple lenders. This will let you see which lender will offer you the best deal. Once you decide on a lender, cancel the other applications or your loan may get stuck at your school since they will have multiple certification and need you to decide which one you want. Are there benefits to a private loan? Yes. Private loans include high borrowing limits There usually is no origination fee for this type of loan. That means there are no up-front costs. But read the fine print. Another benefit of private loans has to do with your expected family contribution (EFC). This number comes from your federal application for student aid. It is the amount your family is expected to pay towards your education based on the financial information you provided. However, many families don’t have the money to pay this amount.. That’s where private student loans come in. You can use a private student loan to borrow your expected family contribution if your family does not have it saved, as most don’t. There are loan minimums and maximums. You may not be able to get a loan for the amount you need if it falls below a minimum or above a maximum. Though each lender is different, loan minimums are usually around $1000. Maximums are connected to the cost of your tuition, with higher costs meaning higher limits. Knowing about loan maximums and minimums is important because you may not need that much aid, or maybe need more than what is offered. Private loans can also have a few benefits that other loans do not. For instance, some lenders lower interest rate for good grades by college students or for setting up ACH payments, instead of check payments. Be smart about taking out a private loan. The idea of borrowing money can seem like a quick and easy fix to financial troubles. However, all loans must be paid back. This means that you must be responsible in your borrowing. Interest Rates The interest rate is important because it can dramatically affect your payment amount. The interest rate will be a percentage rate charged against the amount you are borrowing. This is what the lender charges you for lending you the money. The type of interest rate is also incredibly important for private loans. There are two types of interest rates- fixed rates and variable interest rates. Fixed interest rates do not change for the life of the loan. It will always be the same amount from day one until you pay off the loan. Variable interest rates do change. These rates depend on the market, among other factors. That means your interest rate could be higher than expected or lower than expected based on market trends. You should consider that it may increase over time and your payment could change dramatically. If you choose a variable rate, read the fine print and verify if there is a cap on the rate. If your 5% rate goes to 15%, your payment may become unmanageable. If you or your cosigner have good credit, private loans can have lower interest rates than federal loans. Repayment Plans Another major factor in deciding on a private loan is your repayment plan. Loans have a minimum payment that must be made monthly towards the loan. It is important to consider when you will have to start paying towards the loan. You might have to start your repayment plan while in college, or some loans let you defer payment. Either way, you will have to consider how the payment on the loan will affect your budget during and after college. Tips: Making a small payment, $25 or $50, or interest payments while in school, may count as a positive towards your credit report and score. Ask your lender. Typically, repayment terms for private student loans can be anywhere between 5 to 20 years. The repayment term is important in how much your payment is and how much you back over the life of the loan. Longer terms mean lower monthly payments but higher interest rates and a higher total cost. Short term loans have higher monthly payments but lower interest rates and lower total cost. Basically, the quicker you pay back your loan, the lower your total loan cost will be. However, it all depends on your budget and what you can afford. College is one of the biggest costs you will ever face. It also is one of the best investments you can make for your future. There are many options out there for student aid, but you may not qualify or the amount you are eligible for still may not be enough to cover the total cost of attendance. Private loans can be a helpful resource in filling the gaps. Remember to carefully consider, the interest rates, repayment plans, and qualifications for your private student loan. You should borrow responsibly since you must pay back every dollar with interest. This can be one of your largest payments besides rent or a mortgage. Only borrow what you need.