The costs of education in the United States are getting higher than ever. It’s no secret that students are struggling to pay their scholarship fees nowadays. When federal loans are no longer enough to cover the black hole of college expenses, all that’s left to do is turn to private lenders. That’s where private loans come in as an alternative type of financial aid designed to help students make it through several years of higher education.
What Are Private Student Loans?
A private loan is a form of financial aid that significantly differs from scholarships, grants, and work-study arrangements. Usually, students turn to private loans once they’ve exhausted the already mentioned types of financial assistance.
A private loan can be used for educational purposes only. However, that includes expenses beyond just the college tuition, meaning you can use money from a private lender to cover additional fees, accommodation, transportation, books and supplies, as well as child care. It’s important to mention that private student loans cannot be used for clothes, restaurant dining, vacations, vehicles, and other expenses not directly tied to education.
The way most private student loans work is simple – you’ll be able to borrow an amount of money up to the total cost of your tuition, minus other financial aid you’re receiving. Naturally, the exact arrangement you get will depend on your situation and the lender you choose. In most cases, once your loan is finalized, the money will be forwarded to your school to cover the necessary expenses whereas anything that’s leftover will be sent to you.
Moreover, private lenders who provide these loans require you to meet a certain set of criteria in order to be approved for financial help. These requirements include good credit, which most students don’t have yet. That’s why, in most cases, students apply for private student loans with the help of a cosigner, as explained below.
Do You Need a Cosigner for a Private Student Loan?
Undergraduate students are usually not able to meet any private lender’s requirements on their own. The good news is that they can apply for a private student loan with a cosigner – a financially stable person who can back them up. Upon submitting an application, the lender usually reviews both the student’s and the cosigner’s credit history to determine whether they are eligible for the loan. Read more about applying for a private student loan below.
What Is the Difference Between Federal and Private Student Loans?
What makes federal loans different from private ones is the fact that they are very limited. That’s why private student loans exist in the first place. Federal loans are limited to a specific amount per year of undergraduate study. However, in many cases students are not able to cover all their expenses with these limited loans. Hence, they turn to private lenders.
While private loans are offered by banks, credit unions, and online lenders, federal student loans are offered by the Department of Education. In either case, you have to meet a certain criteria to be eligible for financial aid. It is important to mention that federal student loans have lower interest rates and more convenient repayment options. That’s why it’s recommended to consider federal student loans your first option before turning to private ones.
Moreover, when it comes to federal student loans, there’s only one application form that determines your eligibility. With private lenders, however, you will come across many different rules and requirements, meaning you could qualify for a loan from one lender while not necessarily qualifying with others. Overall, the limitations included in federal financial aid for students leave a huge gap in tuition costs, which is why many have to turn to private lenders on top of already having a federal loan approved.
Do Private Loans Have Fees?
Yes, private loans include the following fees:
- Origination fee: This fee is charged when you take out a loan. It usually equals a certain percentage of your loan amount and it differs depending on the lender you choose.
- Application fee: Many private lenders have an application fee you must pay when you submit an application.
- Late payment fee: As the name suggests, this fee is charged in case you miss a payment. The amount charged in this case depends on your contract with the private lender.
- Prepayment fee: Some lenders also charge a prepayment fee in case you pay off your loan early.
How to Decide Which Private Student Loan is Best for You?
Choosing the right private lender for you can be a challenge, especially now that you have so many options out there. Here are a few tips to help you make the decision:
- Start by doing your research - Put together a list of student loan lenders that peak your interest. Make sure to look at every single option before narrowing your list down.
- Take a look at the eligibility requirements - Not all private lenders will have the same requirements. Quite the opposite! Make sure to look into each lender individually and see whether you’re eligible to apply in the first place. You can increase your chances of getting approved by adding a cosigner. In that case, the cosigner needs to meet the said requirements as well.
- Review the terms - Take time to review the loan terms and make sure to fully understand what would happen if different situations were to occur. It is important that you understand all aspects of this situation, from initial requirements to your responsibilities if you were to take out that loan.
- Prequalify for multiple loans - Send multiple applications to be able to get quotes from different lenders. That way, you can compare different loan terms and see which one is the best fit for you. In most cases, the offer with the lowest rate is the one you should go for. However, make sure other terms are aligned with your needs as well.
- Close the deal - Once you’ve picked out the best out of the bunch, contact the lender and proceed to sign the agreement.
Keep in mind that every private lender has their own set of procedures regarding loan applications. Once you’ve selected the right lender, you will follow the next steps:
- Check the credit score. Make sure yours or your cosigner’s credit is high enough to be eligible for the loan.
- Contact the lender to get prequalified. At this stage, you will receive rates specifically designed for you. The rates shown on lenders’ websites are not always going to apply to you, as these numbers depend on your financial situation and the amount you’re looking to borrow.
- Send in the application. If the rates look good, proceed to send the application, which includes detailed financial history and school info.
- Sit back and wait for the lender to confirm your application. This can take anywhere from a few days to a couple of weeks.
Are Private Student Loans a Good Option?
In an ideal scenario, students wouldn’t have to take out a bunch of loans to cover educational expenses. However, tuition fees are not getting any lower and the cost of transportation and housing is consistently growing. With that in mind, private student loans become a necessity rather than an option.
Compared to federal loans, they do offer high borrowing limits and flexible eligibility requirements. If you opt for a private student loan, make sure you fully understand what you’re signing up for. This Student Loan Calculator can help you understand your expenses for the upcoming years.