Private Student Loans Guide That Covers Everything You Need To Know

(Scroll down to find a comparison table of private student loans lenders)

What You’ll Find In this Guide

In this guide we’ll provide you with everything you need to apply for private student loans. By the time you finish reading this guide, you’ll have an understanding of how the process works, how to get the best terms, and what potential traps to avoid.

The guide will cover the following topics:

• Private Student Loans vs. Federal Student Loans
• Qualifying for a Private Student Loan
• Adding a Co-signer to Your Loan
• Private Student Loan Terms and Loan Amounts
• Fixed vs. Variable Loan Rates
• Private Student Loan Interest Rates and Fees
• Private Student Loan Deferrals
• Rate reduction Refinance vs. Consolidation
• What if You Can’t Pay Your Private Student Loan?
• Private Student Loan Traps
• Lenders Who Offer Private Student Loans Under the Most Favorable Terms

Private Student Loans vs. Federal Student Loans

There are two basic types of student loans, private and federal. Private loans are typically issued by non-government lenders, primarily banks. Federal student loans are just what the name implies, student loans issued and guaranteed by the federal government.

While both loan types do essentially the same thing – provide financing to college students for their educations – there are significant differences between the two.

Those differences include:

Payment deferral. Some private student loans do require very small monthly payments while you are in school, in an attempt to minimize the amount of debt that you need to take on. However, full  deferral of payments until after graduation is typically an offered option. Federal student loans, on the other hand, provide complete deferral while you’re in school.

Subsidized loans. Federal loans may provide interest relief to undergraduate students who are determined to have a financial need. This subsidy is not available for private student loans.

Origination fees. Federal student loans can require that you pay an origination fee of between 1% and 4% or more of your loan amount. That can add many thousands of dollars to the cost of your loan, particularly if the fees are financed through the loan itself. Private student loans typically do not require that you pay an origination fee.

Interest rates. Both federal and private student loans offer fixed rate loans, and the rates between the two are comparable. However, private student loans also provide variable interest rates, that can be several points lower than fixed rates.

Loan term. Private student loans generally allow you up to 15 years repay your loan. Federal student loans will allow up to 25 years.

Credit qualifying. Private student loans typically require that you qualify for the loan based on your credit and income. If it is deemed to be insufficient, you can qualify by adding a cosigner. Except for PLUS loans, federal loans don’t require credit qualifying, nor will you need to have a cosigner added to the loan.

Inability to pay. Federal loans offer certain programs that can either reduce your monthly payments, or even forgive part of the indebtedness if you meet certain criteria:

• Income-Based Repayment Plan (IBR Plan) – Limits your monthly payment to about 10% of your “discretionary income”.
• Public Service Loan Forgiveness (PSLF) Program – Forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer.

Private student loans may also offer assistance in the event you are unable to pay – please see the section What if You Can’t Pay Your Private Student Loan? below.

Qualifying for a Private Student Loan

In order to qualify for a private student loan, you must be either a US citizen or a permanent resident alien. You must also be enrolled full-time, or at least “half time”, in a degree granting program at an eligible college or university.

Private student loan lenders will also require that you credit qualify for the loan. That means that you either have to qualify based on your own credit and income, or you can qualify based on the financial strength of a cosigner (see next section). You will also need a cosigner if you have not attained legal age in your state.

As to the actual application process, the basic requirements include providing the following:

• Your name, address, phone number, and email address
• Date of birth
• Social Security Number
• Employment history, a copy of a recent pay stub, and likely a W2 from the prior year
• Employer contact information
• Your monthly housing payment
• The college you will be attending, as well as the cost to attend
• Evidence of any financial aid expected
• Expected date of graduation
• The specific loan amount needed as well as your preferred loan term

This is just a general list of information and documentation you should expect to provide. Specific requirements vary from lender to lender, and additional documentation may be requested.

If you are applying for a student loan on your own, the lender will expect to see that you have a good credit history, as well as sufficient income to make the debt payments. The specific qualifications will also vary from one lender to another.

Adding a Co-signer to Your Loan

In the event that you are unable to qualify for a private student loan based on your own financial profile, you can add a cosigner to your loan application. As noted earlier, this will also be a requirement if you are not of legal age in your state at the time you apply for the loan.

Your cosigner will also be qualified based on credit history and income. A cosigner’s income will need to be sufficient to make the student loan debt payments, as well as covering their own debt obligations.

In the event that you default on your loan at any time during the term, the lender will be able to pursue payment from your cosigner, which is the entire reason why the lender will want such a person added to your loan.

Co-signer release option.Most private student lenders will permit a cosigner release from the loan. The typical requirement is that you must make between 24 and 48 consecutive on-time monthly payments. However, in addition to the on-time payments, your cosigner will only be released if you are able to qualify to make the loan payments on your own credit and income. Naturally, this will typically not happen until after you graduate and are employed.

Private Student Loan Terms and Loan Amounts

Private student loans typically run in terms of between five years and 15 years.

Loan amounts normally vary based on the type of degree program. For example, a private student lender may offer up to $120,000 toward an undergraduate degree, but $160,000 toward a graduate degree. There will be separate amounts or professional degrees, including business, law, and medicine (see lender table below).

Some also have a maximum student indebtedness limit. For example, a bank that will lend up to $120,000 toward an undergraduate degree, but may also have a total student loan debt limit of say, $170,000. That means that while they will lend you up to $120,000, you will be limited to no more than $50,000 in student loans from other sources, such as federal student loans.

Some lenders provide student loans for the refinance of existing loans only. Most others however provide loans for new students, as well as for the refinance of existing student loans from other lenders.

Fixed vs. Variable Loan Rates

A fixed rate is just what the name implies. Your loan will have a single rate that will be in effect for the entire term of the loan. That will also result in a level monthly payment throughout the term.

Variable rate loans are typically 2% to 3% lower than fixed rates at the beginning of a loan. This can result in a substantially lower monthly payment, but your rates can change over the life of the loan.

Variable interest rates are usually based on a common index, such as the Prime Rate or the one-year LIBOR rate, plus a margin. For example, if the LIBOR rate is 2.15%, and a margin of 1.75% is added, then your rate will be 3.90%. If one year from now, the LIBOR is 2.35%, then your rate will increase to 4.10%.

It is even conceivable that the rate you pay on a variable interest loan will be higher than what it would have been for a fixed rate loan at some point during the term. Some lenders put a cap on how high a variable interest rate can go. For example, Wells Fargo caps variable rates at 18% over the life of the loan.

Private Student Loan Interest Rates and Fees

Some private student loan lenders charge origination fees, application fees, disbursement fees, and even prepayment penalties. Origination fees are common with federal student loans, and can range anywhere between 1% of the amount borrowed, to more than 4%. In our lender table below, we have presented only private student loan lenders that charge no fees for their loan products.

Interest rates fall within a wide range, and are based on the credit history of either the student or the cosigner. Interest rates on fixed rate loans can range from less than 4%, to as high as 12%. Variable-rate loans have much lower interest rates. They typically start in the 2% to 4% range, but can run a few points higher on a weaker credit profile.

Your credit score and your cosigner’s score matter when you apply for a private student loan. For that reason, you should make every effort to improve your credit score before you apply for a loan. That may involve either correcting mistakes on your credit report, or even engaging the services of a trusted credit repair company. A low credit score can result in paying an interest rate that is anywhere from 1% to 8% higher than the best rate available.

For example, if you borrow $50,000 on a 15 year loan at 5% with good credit, your monthly payment will be $395. But if due to fair credit, your rate on the same loan is 8%, then the monthly payment will be $478. That’s a difference of $83 per month, or more than $1,000 per year. Since it will take you 15 years repay the loan, the total cost will be more than $15,000 over the life of the loan.

Private Student Loan Deferrals

Virtually all private student loans offer some form of deferral arrangement while you are in school. This typically covers not only your time as a student, but usually an additional six months after graduation.

There are different options available for deferrals:

• Full deferral – you make no payments until after graduation, or after the six-month deferral grace period after graduation.
• Interest only – you make interest, but not principal, payments on your loan; this keeps the interest from being added to your final loan balance.
• Small fixed monthly payment – for example, Discover Student Loans requires a $25 per month payment during the deferral period. It usually doesn’t cover what the payments would be, but it also has the effect of minimizing the amount you owe upon graduation.

You always have the option to reduce the principal balance on your loan while you’re in school. This is another strategy you can use to minimize the amount of debt you will owe after graduation.

Rate reduction Refinance vs. Consolidation

These are the two forms of student loan refinances. In an actual refinance, you are taking a loan that will lower the interest rate, and often the monthly payment.

A consolidation is a refinance in which you are merely consolidating several student loans into a single loan, with a single monthly payment. It is possible that you will have a lower payment, if the term of the consolidation is longer than what the term is for the various loans that you are consolidating.

However consolidation loans don’t involve reducing your respective interest rate. Instead, the lender averages the interest rates on your various student loans, and assigns a comparable rate on your consolidation. It’s mainly a strategy to either lower your monthly payment, or eliminate multiple loan repayments.

Private Student Loan Traps

Using student loans to pay for college has become a necessary strategy in today’s world. But the same time, you need to be aware of factors related to the loans that can go horribly wrong without sufficient advance consideration and preparation.

Some examples include:

Borrowing more than you can reasonably afford to repay. It’s always important to realize that you will have to repay your student loans after graduation. That should serve to put a limit on how much money you will borrow. You should never borrow more than you are likely to be able to afford to pay based on the career that you will be entering.

Your credit score matters. The better your credit history, the lower the interest rate you will pay. Once again, this is why it is absolutely necessary to improve your credit score before applying for a student loan.

Your loan pay history will affect the credit of your cosigner. If you fail to make your loan payments on time, the late payments will also damage your cosigner’s credit. And if you default on the loan, the lender will require full satisfaction of the loan from your cosigner.

Variable interest rate increases. The lower rates on variable-rate loans can be welcome relief compared to fixed rates. But it’s always important understand that variable rates can increase in the future. It is entirely possible that you will ultimately pay more interest over the life of a variable rate loan than you will with a fixed rate loan.

Refinancing federal student loans. You should only consider refinancing federal loans with a private student loan if there will be significant savings in both the interest rate and the monthly payment. Federal student loans offer both the IBR and PSLF options for payment reduction or debt forgiveness that are not available if you refinance into private student loans.

What if You Can’t Pay Your Private Student Loan?

Despite the fact that private student loans don’t offer IBR and PSLF plans, many do provide assistance in the event that you are having trouble paying your debt.

Most lenders will offer a refinance option, that will enable you to put your various student loans into a single loan with both a lower interest rate and monthly payment than you had with the combination of the loans refinanced. For example, one way to lower the monthly payment is to refinance into a new loan with a longer-term.

Some will even offer specific assistance in the event that you are unemployed, returning school, or facing some other economic hardship. They may provide you with a time of forbearance, perhaps up to one year, in which your monthly payment will either be reduced or suspended entirely.

You should make sure that any lender with whom you are applying for a private student loan has provisions for certain hardships.

Lenders Who Offer Private Student Loans Under the Most Favorable Terms

Below is a table listing lenders who provide private student loans. Virtually all offer both fixed and variable rate loans, and charge no associated loan fees. Though they offer various maximum loan amounts, most provide for cosigner release. This will be an important consideration, since most student loans do involved a cosigner.