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Private student loans are student loans offered by private lenders to help pay for the cost of college or graduate school. Often, scholarships, grants and federal student loans are not sufficient to pay for the full cost of college or graduate school. Private student loans help bridge the gap between the cost of attendance and your financial aid. You can use private student to help you pay for tuition, books, room and board and other educational expenses. Unlike federal student loans, private student loans are available with both fixed interest rates and variable interest rates. Depending on your credit worthiness, you may be able to get a lower interest rate with private student loans than with federal student loans.
You are a good candidate for private student loans if you meet the following criteria:
If you don't meet these or any other requirements, you can apply with a qualified co-signer such as a parent. A co-signer can help you get approved for private student loans and get a lower interest rate. Each lender has its own underwriting requirements. For example, some lenders may evaluate additional criteria, such as your debt-to-income ratio. Most lenders may require that you graduated from a Title-IV accredited college or university.
Private student loans are available for both college and graduate school. After considering options such as scholarships, grants, financial aid and federal student loans, you should consider private student loans to help pay for school.
You should consider your options for federal student loans first before borrowing private student loans. With private student loans, you are borrowing from a private lender, not from the U.S. Department of Education. Federal student loans offer several unique benefits that may not be available with private student loans, such as forbearance or deferment. That said, some private lenders offer options for financial hardship and other types of student loan deferment that are separate from federal programs. Private student loans also aren’t eligible for public service loan forgiveness or a federal income-driven repayment plan, for example.
There are no fees to borrow private student loans. Most lenders don’t charge application fees, origination fees, or prepayment penalties.
To apply for private student loans, you may be asked to upload the following documents or information:
Before you borrow your student loans, most lenders let you check your estimated new rate before you submit a full application. This is called a soft credit check, and there is no impact to your credit score.
If you like your new rate, you can submit an application to borrow private student loans. At that time, a lender will pull your credit. This is called a hard credit check, and your credit score is impacted by a few points. You can apply to multiple lenders within a short time frame such as a week, and it will only count as a single credit inquiry. When you make on-time payments on your new loan, you can increase your credit score over time. This is because on-time payments comprise 35% of your FICO score, whereas applying for any new loan counts as 10%.
To get the lowest private student loans rate, make sure to compare lenders. Most lenders reserve the lowest private student loans rates for borrowers (or cosigners) with strong credit and income as well as a lower debt-to-income ratio. Variable interest rates tend to be lower than fixed interest rates, so you may be able to save money with a variable interest rate student loan. To save interest, you can also choose a shorter student loan repayment term. Typically, a shorter student loan repayment period such as 5 years will have a lower interest rate than a longer student loan repayment period such as 20 years.
When evaluating private student loans, you should compare at least the following across lenders:
There are several differences between federal student loans and private student loans.
Federal student loans are issued by the U.S. Department of Education and available to all borrowers, regardless of need, credit history or income. The most popular types of federal student loans are Stafford, Perkins and PLUS Loans. With federal student loans, each borrower receives the same fixed interest rate, meaning the interest rate of a federal student loan will not change over the life of the student loan. Federal student loans also offer several borrower protections such as income-driven repayment programs, deferral and forbearance.
Private student loans are issued by online lenders, banks and credit unions. The federal government does not issue private student loans. Unlike federal student loans, private student loans have both fixed interest rates and variable interest rates. A fixed interest rate means that the interest rate will not change over the life of your private student loan. A variable interest rate means that your student loan rate will rise or fall with movements in interest rates. Typically, a variable interest rate student loan has a lower rate than a fixed interest rate student loan.
For private student loans, borrowers with strong credit may be able to obtain a variable interest rate that is lower than a federal student loan interest rate. The best private student loans lenders also offer some form of payment flexibility due to unemployment or hardship.
When you borrow private student loans, you can choose between a fixed and variable interest rate. In contrast, federal student loans only have fixed interest rates and do not offer variable interest rates. A fixed interest rate means that the interest rate on your student loan will never change for the duration of your student loan. A variable interest rate means that the interest rate on your student loan can change over time based on movements in prevailing interest rates.
A fixed interest rate will provide you with more certainty and predictability because you will have the same interest rate every month. Since the interest rate on a variable interest student loan can change, you may have a higher or lower monthly payment over time. Typically, the starting interest rate on variable rate loans are lower than on fixed rate loans.
The process to get a private student loan is straightforward:
If you have a strong credit score, work experience, stable income and a history of financial responsibility, then you may be a good candidate for private student loans.
However, if you have a limited or no credit history (such as when you apply to college), you may be asked to have a cosigner to help you.A cosigner is someone – such as a parent, grandparent, spouse, mentor or other creditworthy family member – who assumes equal financial responsibility for your student loan. A qualified cosignershould have a strong credit score, history of financial responsibility and stable income. The advantages of having a cosigner is that a cosigner can help you get approved for private student loans and get a lower rate. Since lenders are focused on minimizing their credit risk, they want to have comfort that a creditworthy individual can serve as a cosigner for a student loan if you’re unable to repay your student loans.
There are risks to serving as a cosigner for private student loans.For example, the cosigner is financially responsible to repay the student loan if the primary borrower does not repay, or defaults on, the student loan. As a cosigner, your credit score could be impacted due to any missed or late student loan payments.