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It’s a well-known fact that going to college is expensive. Even if you stay in state or qualify for federal assistance, the total cost of attendance includes more than tuition. And, with annual tuition often in the tens of thousands per year, figuring out how to come up with the funding to attend school is nothing short of overwhelming. While federal loans come with a wide range of borrower benefits like fixed interest rates, flexible repayment plans and loan consolidation, they don’t always cover the full cost of attending college.
Federal loans are offered based on need, and often students receive some federal aid but still must fill a funding gap to pay for any remaining tuition costs as well as things like housing, books, and other incidental expenses.
That gap is where private loans come in to cover those additional costs—be it housing and food during the school year or offsetting expenses during the course of an unpaid internship. Private loans can pick up much of the slack, but students need to do their due diligence or risk high interest rates and low credit scores in the long term. Here’s what you need to know before you apply for private student loans to cover your educational investment.
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What are Private Student Loans?
Private student loans are made by private organizations like banks, credit unions, and state-affiliated organizations. Terms and conditions vary based on the lender, and interest rates are dependent on factors like your income or credit score. While private student loans are often more expensive in the long run than federal student loans, they do come with certain advantages. Private loans aren’t need-based, so there’s no borrowing cap, unlike federal student loans, which for most students don’t cover the full cost of attending college.Read More
How Do Private Loans Differ from Federal Loans?
Every private lender is a bit different, but they share some common ground. As per the federal government, different rules apply to private loans compared to federal student loans.
Here's a quick breakdown that covers some of the major differences between the two:
- Federal loans come with fixed interest rates, whereas, private student loans vary by lender. Some lenders offer fixed rates, while others offer variable rates based on the borrower's credit score and other factors.
- With private loans, your credit score and income determine your interest rate, much like applying for an auto loan or a new credit card. As such, if you don't qualify on your own, you may need a co-signer to gain approval.
- By contrast, federal student loans offer the same interest rates to all qualified applicants, regardless of credit score or income.
- Private loans also come with a range of repayment terms, which vary by lender. In most cases, you'll have between five and 20 years to pay back the loan. Federal loans offer several repayment options. Examples include income-based repayment plans, a 10-year standard repayment plan, and more.
- Federal programs may sometimes offer loan forgiveness in specific cases. For example, public service workers making regular payments may be eligible for a forgiveness plan after a certain period. Often, you'll need to work in a specific area or work with a certain employer for a pre-determined period to qualify for loan forgiveness. Examples include educators or healthcare workers that work with underserved communities.
- More Borrowing Power - Again, because private loans are not need-based, students can potentially borrow a lot more, allowing them to cover the entire cost of attending even the most expensive college.
- No Lifetime Limits - Federal student loans also don’t always cover advanced degrees or a second bachelor’s degree. Meaning, prospective students looking to switch careers or advance in their field may need to look toward private loans to finance their education.
- No FAFSA - The federal student loan application process is long and complicated. With private loans, anyone (or their co-signer) who can meet the income and credit qualifications can borrow what they need to finance their education.
- May not include income-based-repayment - Student repayment assistance isn’t the norm with private student loans. While repayment options vary by lender, there is generally less flexibility for borrowers who happen to fall on hard times. Federal student loans allow borrowers to apply for income-driven repayment plans, which adjust payments to 10-20% of their income, depending on the program. Unfortunately, if a borrower can’t keep up with their private loan payments, it can severely damage their credit history.
- Do not include any possibility of loan forgiveness - Unlike federal student loans, loan forgiveness isn’t an option with private loans.
- May have to start repayment process while still in school - Most lenders offer some type of grace period, but others require students to begin paying the loan back while still in school, possibly even as soon as the funds are disbursed.
- You must have good credit - private lenders base approval decisions on income and credit score, which means that students without a credit history may need to get a co-signer or they’ll face higher interest rates.
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Co-signers are people who agree to pay back a loan if the primary borrower cannot do so themselves. The inclusion of a co-signer will also often lower the interest rate on the loan, because of the added positive credit history. Often, parents or close family members co-sign on behalf of a student if that student has no credit history or isn’t bringing in much income. Anyone can be a co-signer, so long as they have good or excellent credit and enough income that they could realistically make payments on the loan.
Fixed or Variable Interest Rates
Fixed loan rates have the same interest rate throughout the entire borrowing period, while variable loans have interest rates that change over time. In some cases, fixed rates are preferable to borrowers, as they ensure a predictable monthly payment.
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Variable interest rates may increase or decrease over time. The benefit of variable interest rates is, they often come with lower interest rates and can be a good option for short-term borrowers. Long term, however, variable rates may increase over time, meaning you might pay more than anticipated during the payback period. Both options have pros and cons. Fixed rate loans don’t come with the possibility of a lower rate down the line. However, variable interest rates may be more of a gamble.
What Are Interest Rates and What Affects Them?
Interest rates are a proportion of a loan charged to the borrower based on a percentage of the outstanding balance. Interest rates are determined based on a number of factors. These might include credit, income, the lender you choose, or whether you take out a variable or fixed-rate loan.
Private loan interest rates can range considerably—under 3% at the low end and up to 12% at the higher end of the spectrum. If you have a limited credit history or a low credit score, you’re less likely to secure a favorable interest rate and may end up paying back much more than you bargained for.
That said, you should shop around to find the best interest rates. Many lenders allow you to apply for a quote to check any preliminary offers before sending a formal application. Keep in mind that applying for loans can impact your credit score too, as every time a lender runs a report it lowers your score.
Things to Consider
The key thing to keep in mind as you look into various student loan options is, private loans lack many of the borrower protections you’ll get with federal student loans. However, because federal loans often don’t cover the entire cost of attending college, private loans are a necessity for many students who still need to pay for the rest of their tuition, housing, and supplies.
Since loan terms are all over the place, borrowers should shop around to find the best loan with the best interest rates. Loan terms aren’t standardized across the board, meaning you’ll need to do some research to find the best deal. Look at online reviews, check the Better Business Bureau website, and see what people have to say about the experience.
Here are a few questions you’ll want to ask as you look over your options:
- What kind of credit requirements are associated with this loan?
Private loans require a credit check and lenders will evaluate your income, assets, debts, and what you plan on studying. Find out what your interest rate will look like based on credit or whether you’ll need a co-signer to secure a lower rate.
- Does the loan come with an origination fee?
Many lenders charge what is known as an origination fee on private student loans. There’s no cap on these fees, and as is the case with interest rates and repayment terms, origination fees vary based on lender.
- What is the late fee?
What happens if you miss a payment? Is there a grace period for late payments?
- When does repayment begin?
Most loans don’t need to be repaid until you’re done with school. However, some loans may come with terms that require you to start paying before graduation rolls around. Find out when repayment is expected, if there’s a grace period, and also, if there’s the option to start making payments early.
- Is it possible to defer or reduce loan payments if there is a hardship?
Where some private lenders aren’t all that flexible when it comes to dealing with periods of unemployment or financial hardship, others are willing to work with borrowers. As such, it’s a good idea to find out as much as you can about how the lender handles situations where it may be too difficult to make monthly payments in full.
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- Will this loan affect eligibility for other types of financial aid?
If you qualify for federal aid, it’s best to explore that option before committing to a private loan, as there are more protections in place for borrowers. If the loan could prevent you from getting additional aid in the form of a scholarship, grant, or federal loan, hold off on signing on the dotted line.
Sallie Mae Private Student Loans
Sallie Mae at one point, was a government-sponsored lender, supporting the federal student loan program. In 2004, Sallie Mae became 100% private and today the lender offers both banking services and private student loans. Sallie Mae student loans offer a few extra protections to student borrowers, making this an option worth exploring. Here’s a bit of background:
Why Sallie Mae for Private Student Loans
Sallie Mae loans, while private, do come with some notable perks compared to other private lenders. For example, this option is available to part-time students and those pursuing undergraduate, graduate, MBA, and law degrees. They also provide loans to medical students during their residency, parent loans that help parents pay for their child’s undergraduate degree, and loans that cover career training.
As with other types of private loans, it’s worth looking into federal aid, grants, and scholarships first.
To apply, you’ll need to provide the following information:
- Proof of Citizenship
- Social Security Number
- Employment Information
- Financial Information
- Personal References
- School Information
- Amount Requested
Some sources report that, to qualify, you’ll need to have a credit score over 700. This means that younger borrowers may need to get a cosigner to help them out. Older students, such as those returning to school for an MBA program after a few years in the workforce, may be able to secure decent terms on their own.
With Sallie Mae loans, the repayment period typically ranges from 5-15 years after graduation. The lender offers interest rates based on a variety of factors—and in general, you can expect to pay between 3.4% and 11.4% interest on your loans.
What’s more, there are a few different repayment options available, making this one of the more flexible borrowing choices.
- Deferred Repayment: Deferred repayment offers a six-month grace period after graduation while you look for work and get settled. It also means that you won’t be required to make any payments toward the balance while you’re still in school.
- Interest Repayment: This option allows you to pay off all accrued interest while in school and during the post-graduate grace period. The benefit of this plan is, you’ll become eligible for a 1% interest rate deduction lowering the overall cost of your loan.
- Fixed Repayment: This option allows you to cut down on interest. You’ll pay $25 a month toward your loans while still in school and during the grace period. After that, you’ll start making full payments toward the principal and the interest.
- Forbearance: As mentioned above, forbearance is a financial hardship option that allows you to pause payments temporarily. You’ll need to apply for forbearance and may be eligible to pause payments for up to 12 months total for the life of the loan. To qualify, you’ll also need to make a payment of $50 per loan.
- Cosigner Release:
Cosigner release means that, even if you needed a cosigner to get the loan initially, you can release the cosigner and take on the full responsibility yourself. This is likely to be attractive to cosigners who may not be too keen on shouldering a 5-15 year burden on behalf of the student. Instead, students can take over the loan after they’ve established some credit history and are in a better place financially.
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Features and Benefits
As mentioned, Sallie Mae is an attractive option for many borrowers, as it strikes a balance between the flexible repayment options you’ll get with federal aid and the ability to cover funding gaps you’ll get with private loans.
- One of few lenders that offers loans to part-time students
- Available to non-US citizens
- DACA students can apply with a co-signer
- Borrowers gain access to credit score tracking and online tutoring
- Multiple private loan types—including graduate degrees and career training programs
- Option to choose between fixed and variable interest rates
- Interest rate reductions for automatic payments
Most private loans involve a monthly payment for a fixed period—typically ranging from 7-15 years after graduation. Some lenders offer longer repayment plans, sometimes up to 30 years, though eligibility depends on the amount of debt, income, and other factors.
While most private student loans don’t start repayment while you’re still in school, many repayment plans begin six months after graduation.
That six-month grace period is typical for both private and federal student loans, designed to give students a chance to find work and settle in before you’re on the hook for monthly payments. That said, some private loans accrue interest during the grace period, so you may want to make payments if you have the financial means to do so.
Another option is applying for deferment or forbearance. Deferment allows borrowers to hit pause on monthly payments without accruing interest, while forbearance allows borrowers to postpone making payments, though the loan will continue to accrue interest during that time. Though these options are more common with federal loans, some private lenders do offer them to borrowers that meet certain criteria.
Bottom line: always read the fine print before taking on a loan. There are plenty of private lenders that offer borrowers some protections during unemployment or financial hardship.
How to Apply for Private Loans
Broadly speaking, applying for a private student loan is easy. It’s much less complicated than filling out the FAFSA form, and in most cases lenders allow you to submit an application online. That said, you’ll need to gather some additional information to complete the task.
Applicants typically need to submit information about their income, assets, credit history, and a driver’s license, SSN, and proof of citizenship. The lender may also ask for other information such as living expenses, housing costs, and tuition. If you’re applying with a co-signer, you’ll need to provide their information, as well. Often, students entering college directly from high school will need a co-signer as many of them don’t yet have much borrowing power.
While you won’t complete the application through your school, the lender will get in touch to verify enrollment, determine the loan amount, and arrange for disbursal. Keep in mind, just because the application process isn’t quite as involved as filling out the FAFSA, lenders will verify that you plan on using the loan for educational expenses, attend an eligible school, and are at least 18 years old with a high school diploma or GED.
Once they’ve checked you out, lenders will typically send money to the school to cover tuition costs, then, whatever is left will be sent to the student to cover other needs such as housing, books, and other living or school-related expenses.
In the end, private student loans can be a lifeline for students trying to figure out how to come up with the money to pay for school. Still, you’ll want to make sure that you shop around for the best possible rates, review repayment terms and borrower protections, and finally—don’t borrow more than you need.