To obtain a private student loan, you must apply directly to a non-federal lender (such as a bank, credit union, or online-only institution) and meet their lending conditions. Nonprofit groups, governmental agencies, and institutions offer private student loans.
In almost all circumstances, if you are an undergraduate with low credit history, you must apply with an acceptable co-signer who fits the lender’s income and credit requirements. Co-signers with good or excellent credit scores will have the lowest interest rates.
Before applying for private student loans, borrow the maximum amount available through federal direct subsidized and unsubsidized loans. These loans are often less expensive than private loans and include insurance against future income decreases, making repayment easier. Parents may find federal PLUS loans to be a better option than private loans, especially if they qualify for the federal Public Service Loan Forgiveness program.
However, in the appropriate circumstances, a private loan can help you overcome a college financial gap. Here’s how to apply and compare your options.
1. Check That You Qualify for a Private Student Loan
Private student lenders want to ensure that you can return the loan on time and with as few missed payments as possible. That’s why banks usually require a co-signer if you don’t have an extensive credit history, which would show whether you’ve previously repaid other forms of loans on time.
To get a private student loan, you’ll be assessed based on the following:
- Credit score.Private student loans, like most installment loans, are dependent on credit. This indicates that the lender considers the borrower’s creditworthiness while determining whether or not the borrower is eligible for a loan. Private lenders normally require a credit score in the high 600s, and the closer you go to the maximum score of 850, the cheaper the interest rate you’ll qualify for.
This is significant since private loan interest rates can rise into the double digits. However, interest rates on federal student loans are now at a record low. For the 2020-21 academic year, federal rates peak at 2.75% for undergraduates, 4.30% for graduates and professional students, and 5.30% for parents. Except for PLUS loans, most federal loans do not require credit.
- Income. To demonstrate to private lenders that you can afford monthly payments, you or your co-signer must have a consistent source of income. Lenders may impose a minimum yearly income or a maximum debt-to-income ratio (which measures debt relative to income).
- Age. Lenders frequently demand student borrowers to be at least 18 years old to apply, however others need borrowers to be 16 years old.
- Citizenship. It is typical for lenders to require borrowers to be US citizens or permanent residents. Some lenders waive this requirement for international students or DACA participants, if the co-signer is a US citizen or permanent resident.
- High school completion status. Obtaining a private student loan requires a high school diploma or equivalent degree.
- School and program eligibility. The school you plan to attend must meet the lender’s qualifying conditions. You may need to demonstrate that you plan to attend at least half-time, that you are pursuing at least an associate’s degree, or that your school is on the lender’s list of approved institutions.
2. Apply for a Private Student Loan Directly Through Lenders
Private student lenders do not compel borrowers to complete the FAFSA, unlike the federal government. You can apply for private student loans directly through the lender’s website, mail, or phone.
If you or your co-signer already have a relationship with a bank that makes student loans, that is usually the best place to start. Loyalty discounts, such as reduced interest rates, can lower loan costs.
However, there are many private lenders out there, and if you look beyond your current lenders, you may be able to get a lower rate or more lenient loan terms. Many lenders include prequalification tools on their websites, allowing you to estimate the rate and term you could receive depending on your or your cosigner’s attributes. You can compare prices without a hard credit check, which may influence your credit score.
If you need to submit full applications to preferred lenders in order to compare your possibilities, do so within a specific time frame. According to FICO, which administers consumer credit scores, it is advisable to complete student loan shopping and finalize your loan within 30 days to minimize the impact on your and your co-signer’s credit.
If you need to apply for a private student loan without a co-signer, consider lenders who specialize in this type of loan.
3. Compare Private Student Loan Options
The most essential aspects of a private loan are its cost, including interest rates and fees, and its perks, such as your possibilities for lowering or deferring monthly payments. When deciding on a private student loan, consider:
- Interest rate. Which rate do you qualify for? How high may a variable rate that changes depending on market conditions go?
Fixed interest rates are frequently the safest bet, but variable rates might be advantageous if you intend to pay off the loan fast and can take advantage of low starting rates. If you choose a variable private student loan interest rate, ask the lender how often it is recalculated (monthly or quarterly) and what index it is based on. This might assist you determine, based on recent interest rate trends, how much more or less you may be needed to pay when your rate fluctuates over time.
- Term. How long will it take to repay the loan? A longer term will result in a reduced monthly payment, but higher interest charges over time.Lenders frequently offer reduced interest rates to consumers who pick shorter loan durations.Consider choosing a term that allows you to have some breathing room in your post-school budget but not requiring you to pay significantly more than you borrowed. Ten years is a usual repayment term for government loans.
- Future monthly payment.Student debts can feel abstract at first. Consider if you will be able to afford your payment when you graduate or leave school. Use a student loan calculator to calculate monthly payments based on the quoted rate and length.
- Origination fee. How much does it cost to take out the loan? Private loans often come with a borrowing fee that can either be added to the loan principal or subtracted from the total money you borrow. For comparison as you look into private loan fees, the origination fee for federal subsidized and unsubsidized loans was 1.059% for 2019-2020 and 4.236% for federal PLUS loans.
- Late fee. How much will it cost to pay your monthly bill late? Are there any extra implications, such as the loss of any interest rate discounts you were eligible for?
- Co-signer release.Check to see if the lender has a co-signer release option, which means the co-borrower can eventually leave the loan and is no longer responsible for payment if the student borrower falls behind. Also, confirm the requirements for co-signer release, such as how many months you must make on-time payments in advance.
4. Remember to Choose Federal Loans First
While many borrowers rely on private student loans to make education more affordable, they should only be used as a last resort if you have a clear plan for paying them off fast after graduation. This is because, in comparison to government loans, private student loans are more expensive and offer significantly fewer benefits. For example, unlike federal loans:
- Private loans cannot be forgiven if you work for a qualifying nonprofit or government organization, are a teacher in specific schools, have been cheated by your school, or meet other qualifications.
- You may be expected to make payments while in school, but federal loans allow you a six-month grace period to adjust to life after graduation before beginning loan payments.
- Private lenders typically offer fewer months of payment delay, or forbearance, compared to federal loans.
- Your loan will normally accrue interest at all times; however, subsidized federal loans do not accrue interest while you are in school, in the grace period, or in deferment, so you will owe less overall.
Before contemplating private loans for college funding, it’s important to apply for financial aid through the FAFSA and qualify for federal student loans.
