How and When To Get A Private Student Loan
According to data published by U.S. News and World Report, tuition and fees at public colleges in the U.S. average $21,184. Among private colleges and universities, tuition and fees run as high at $35,087 a year. Elite private colleges, such as those in the Ivy League, charge more than $55,000 per year. That certainly is expensive and beyond what most Americans can afford to pay out-of-pocket.
Student loans can help, and there are several banks and other lenders that offer private student loans. These are different than government student loans and should be approached thoughtfully. Private student loans can be helpful, but consumers should understand how they work and use them to their advantage. In this article, we offer a primer on how and when to take out a private student loan.
Private Student Loans and How They Work
As the name suggests, private student loans are loans issued by private lenders such as a bank, credit union or other private sector organization. Since the loans are privately funded, they are not subject to the same types of regulations as student loans issued by the U.S. federal government.
Private lenders can charge as much or as little interest as they want, set whatever repayment terms they’d like, and they can throw in any special features they want. In contrast, federal student loans are regulated by the U.S. government. As such, the loans have fixed interest rates, more flexible repayment schedules, and in some cases, a forgiveness option after a certain number of years have passed. Generally speaking, government issued student loans offer more favorable terms than loans provided by private lenders.
Given the benefits of government loans, it is recommended that students explore that option first. It is usually easier to get approved for a government student loan than one issued by a private company. However, if you find that you do not qualify for a government student loan, then you may opt to go with a private lender. Fortunately, there are private lenders that offer competitive rates, flexible repayment terms, and attractive services.
Almost anyone who is an American citizen with a Social Security number and enrolled in college can apply for a federal student loan. This is not the case with private student loans. While anyone can apply for a loan, there are criteria that need to be met to get approval for the loan. This includes the following:
- Be a legal citizen or permanent resident of the United States
- Be 18 years or older, or the legal age of the state in which you live
- Reside in a state where the lender is legally authorized to distribute loans
- Be enrolled in an eligible college or institute of higher education
- Be enrolled in one of the eligible degree programs covered by the lender agreement
Additional criteria may be required depending on the lender and the type of loan taken out. For example, you may be required to provide proof of graduation, employment records, and pay stubs, or other financial information.
A note of caution. Borrowers who take out a private student loan are not eligible for student loan forgiveness programs as they may be with a government loan. Student loan forgiveness is a financial aid program that assesses your financial situation and employment and debt status to see whether a part or the student loan debt can be erased.
There is a lot less red tape when applying for private student loans than when applying for a government student loan. In general, the entire application process is much easier and streamlined when taking out a private student loan. The marketplace tends to dictate the terms found with private student loans and consumers may even be able negotiate more favorable terms than what they are initially offered by a private lender. This is not the case with government student loans, which tend to be more rigid and inflexible. With the federal government, the terms are the terms.
Today, most private student loan applications are handled entirely online. The process can be done digitally, and it is rare for applicants to have to meet with a lender in person. The online process usually entails visiting the website of a private lender or an online marketplace that can connect you with several different lenders. With online marketplaces, you can fill out a single application and have it sent to several lenders at once, which can be a major time saver.
Once a lender is chosen, simply fill out the application form, attach any supporting documentation that is required such as a pay stub, tax form, college acceptance letter, etc. The lender verifies the information provided with the school you’re enrolling with and then contacts you with a loan offer. Be sure to read any loan offer carefully and ensure you fully understand the terms of the agreement. If needed, consult with a lawyer or other professional on the loan terms.
Once satisfied with the terms, you can sign for the loan and the funds will be disbursed by the private lender. In many cases, you can e-sign the required loan documents. Money is usually deposited into your bank account within a few days. Note that some lenders will send your loan money directly to the college or university you’re attending to cover your tuition and school fees. The entire process usually takes two to four weeks to complete.
Other Things to Know
Your credit score is important in terms of the type of private loan and the terms that you are offered. Any outstanding debt, unpaid credit card bills, or black marks on your credit report will negatively impact the interest rates and the repayment terms you must adhere to. Lenders look at several factors when considering you for a loan and credit history is a big factor. For this reason, you should try to get your credit report in the best possible shape before applying for a private student loan.
If your credit report is beyond repair, you may need to have a co-signer for your private student loan. A co-signer is someone, such as a parent, who agrees to take full responsibility for the repayment of your loan if you are unable to pay back the amount you’ve borrowed. Lenders will often give borrowers a lower interest rate for including a co-signer on their application, so having a second signature can be beneficial.
Lastly, be sure you know the type of supporting materials a private lender requires before you apply and be sure you have the needed documentation and information. Failure to produce these materials could negatively impact your chances of securing a student loan.
Private student loans are not for everyone. They can be costly to service over the long run. A government student loan almost always offers better interest rates and terms than a student loan taken out with a bank, credit union, or other private organization. However, if government student loans are not an option, or the amount of a government loan is insufficient to cover the entire cost of your education, then it could make sense to pursue a student loan with a private lender. Just be sure that you clearly understand the terms of the loan and are aware of any penalties should you run into problems repaying it in the future. When in doubt, seek advice from a professional expert.