Everything You Need To Know About Private Student Loans

Fifty years ago, a year at a top-notch American private university cost less than $5,000. Today, the price tag is close to $50,000. Adjusted for inflation, a college education doesn’t cost a lot more than it did in the 1960s. But that doesn’t matter when you look at “real dollars” – it’s almost impossible for most families to come up with that type of money on their own. Even a public college education is out of the reach of many students.

Everything You Need To Know About Private Student Loans

Throughout much of the second half of the 20th century, private student loans weren’t a major source of student aid. College scholarships, federally-guaranteed student loan programs and state education programs made it possible for many students to receive enough money in grants or low-interest loans to pay for their education. However, over time the size of most college endowments has dropped, the US government has instituted more stringent requirements and limits on student lending, and states have cut the amount of money going to their university and college systems.

That means much of the “free” or low-interest money which used to exist has dried up or became more difficult to obtain, and students are being required to pay more of the actual cost of their education. Things got really difficult in the late 1990s and early 2000s because the federal government refused to increase aggregate loan limits, meaning the total cost of college educations was increasing faster than the amount of federal aid that was available, .

Stepping in to fill the gap were banks and other institutions which make private student loans – standard bank loans at market interest rates. Lenders had always had a relatively small portfolio of student loans, but starting in the mid-1990s those loans increased year after year by 25-35%. In 2008 the financial crisis hit with full force, so banks had less money they were willing to lend; at the same time, the government made more federal loan funds available. For those reasons, private student loans took a back seat for a while, but once again they have become an important part of the college financing mix for most students.

Before Applying For A Private Student Loan

Before you decide to apply for a private student loan, it’s best to make sure you can’t cover all of your educational costs through scholarships and existing federal loan programs. Loans from the government almost always carry lower interest rates than private loans, usually don’t require you to undergo a credit check or have a cosigner, and don’t force you to start repayments of the principal until after you’re out of school. Federal loans also have more flexible payment plans and may forgive some of the principal if you work in certain types of jobs after graduation. Maxing out all available federal loan programs before looking to private sources is almost always the right decision.

However, a college education often requires more money than federal loan programs can provide. That’s when it’s time to look at private student loans.

How To Apply For A Private Student Loan

The first and most important step in the process of applying for a private student loan is understanding how much money you really need, by adding up all of the expenses you’ll have for the school year (be sure to include tuition, room and board, fees and incidental living expenses), and then subtracting the amount of money you’ll be receiving in scholarships, federal, state or school loans, and family contributions. It’s seldom a good idea to borrow more than you need, and it’s an even worse idea when you probably won’t have a meaningful job until after you graduate. If you’ve filled out the FAFSA, submitted it to your school and received a financial aid letter, most of this work should already have been done for you.

The next step is shopping – and not the fun kind. This is actual work, contacting banks or lenders in your area or searching online to find institutions which offer private loans for students, and then listing the details of each lender’s programs (many have more than just one type of loan available) on a spreadsheet. You’re looking to find the most favorable interest rates, of course, but you also have to consider things like:

  • repayment terms (such as the term of the loan, whether you have to make payments while you’re still in school, and grace periods)
  • fees
  • aggregate limits on how much you can borrow (since you’ll most likely be in school for more than just one year)
  • repayment terms, including the length of the loan
  • whether there’s a penalty for early repayment

Most lenders also have special terms, inducements or other factors which you should also note. You can check with Sallie Mae (which was once the Student Loan Marketing Association) for their current rates as well; but remember that it’s no longer a provider of federally guaranteed student loans, it’s simply another private lender (albeit one of the largest college loan providers in the country) which has been accused multiple times of not playing fair with student

Once you have all of the information, it’s time to find a loan calculator; there are plenty of them online, or you can ask a friend who’s better at math than you are to help you out. The goal is to figure out the “real” interest rate for each loan (taking fees and other factors into account), so you can compare all of the possibilities and figure out which offers the best deal.

When you’ve settled on a lender, it’s time to get prepared for the actual application process. You’ll need all of your school information (such as the school’s name, the semester or year for the loan, and your major), your home and school addresses and phone numbers, income and expense information, and of course how much you want to borrow. Most lenders will also require a cosigner with a solid financial history, as well as that person’s personal information.

You can either apply online or in person for your loan, after which it can take two to four weeks before you receive an answer. If approved, the money will usually be sent directly to your school unless you’ve made other arrangements with the lender.

What Are The Best Private Student Loans Available?

Some borrowers are eligible for the best private student loans available, which carry interest rates defined as “LIBOR + 2%” or “Prime – 0.5%” and don’t have any added fees. Without going into the details, those are basically the same rates as federal PLUS loans (currently around 6.5%). However, only about 1/5 of applicants will qualify for interest rates like that, because banks usually require a terrific credit rating and a cosigner who also has great credit in order to get the best rates. Don’t forget to also figure in the effect that extra fees will have on the “true” interest rate.

If you can’t get one of those choice loans, you’re probably looking at fixed interest rates of 7% or higher (depending on your creditworthiness and that of any cosigner), or variable rates in the same ballpark as any other type of standard bank loan. With poor credit, the rates can easily hit double digits. There have been numerous lawsuits and government actions against lenders who take advantage of those who need private student loans, so be sure to check all rates and terms very carefully, and research your lender online to see if they’ve been one of those accused of playing games with borrowers.

One way around being socked with higher-than-normal interest rates is to deal with a smaller bank or credit union which you (or your family or cosigner) already do business with. They’ll be more comfortable with your ability to repay a private student loan, and are more likely to offer you their best possible terms.

Private Student Loan Consolidation

When most people think about consolidation, they’re expecting to be able to combine the student loans they’ve taken out over the years, and get one low interest rate on the total amount they owe. That option is still available for federal loans, but you are not allowed to consolidate private student loans with federal ones; the “private debt” you have remains separate and can’t be mixed with federal loans. Private student loan consolidation simply gives you one (hopefully) manageable payment – which will still be set at a market interest rate rather than a federally-subsidized one. It’s also possible that your repayment period can be extended through consolidation, meaning you’ll end up paying more over the long term, but each payment will be lower.

There can be one major advantage to consolidating private student loans. If your credit score has increased substantially since the time when the original loans were made, you could qualify for much better interest rates and terms.

There are two things to consider before making a decision on private student loan consolidation: there may be severe prepayment penalties on your original loans, and it’s a lot harder to find a lender willing to consolidate your loans than it was to find a bank to finance your education in the first place.

Private Student Loans Without A Cosigner

You usually don’t need a cosigner for a federal student loan. However, it is now pretty much standard that lenders require cosigners for private student loans; more than 90 percent of all those loans now need a second signature. That policy certainly makes sense; college students normally don’t have a longstanding credit history or high credit score, so banks need a level of confidence that they’ll eventually get their money back. Most often, a parent, guardian or other relative will be able to serve in this role.

If you can’t find someone willing to “back” your application, chances are that any bank willing to write private student loans without a cosigner will charge a much higher interest rate. The most likely places to issue loans without a cosigner are local credit unions, or institutions where your family already does its banking.

Private Student Loan Forgiveness Programs

There are a number of ways that some or all of your federal student loan debt can be forgiven, such as working as a teacher in a low-income area, becoming a police officer or firefighter, or working for some governmental or non-profit agencies. The so-called “Obama Student Loan Plan,” also known as “pay as you earn,” also allows for lower loan payments and eventual forgiveness, if you’re suffering severe financial hardship. However, these types of loan discharge are not available for private student loans.

The only available option for private student loan forgiveness is a complete discharge of obligations through the courts, and it’s not anything you should rely on. It’s completely at the discretion of a judge, and usually only granted in the case of death or permanent disability. A simple bankruptcy filing will no longer wipe out your student debt; that “loophole” was closed some time ago due to the number of people who were using it. A few courts are starting to become more lenient in private student loan discharge cases, when people can prove “undue hardship” based on poverty, poor health and other circumstances. But if you choose to take this approach, you’ll need a good lawyer.

How To Get A Private Student Loan With Bad Credit

Some lenders are willing to issue private student loans for bad credit applicants – but they come at a heavy price. The interest rates on these loans can be as much as 6 to 10 percent higher than the rates advertised by banks (which, as you’d expect, only advertise the rates they’ll give to their best customers). Fees for those loans can also be 10 percent higher, and loan limits are usually much lower than for borrowers with great credit. Your best bet is to first search high and wide for a cosigner with good credit, rather than commit to these extremely high-priced loans. And of course, you should always first max out all available federal student loans, especially if you have bad credit.

It’s necessary to exercise great care whenever you’re combining private student loans and bad credit; there have been a number of predatory lenders who have charged unconscionable rates to desperate borrowers, and they ended up being sued and fined for doing it. You can check with your local banks and credit unions to see if they’d be willing to work with you on a private student loan despite a poor credit score, but you’ll probably have to search online for firms which specialize in these types of loans.

Private Student Loans: Biting The Bullet

As you’ve seen, private student loans are not the best way to finance a higher education, since rates and terms are always less advantageous than those available with federal loan programs. They’re often necessary, though, due to the high price of a college education, combined with smaller scholarship grants and limits on how much you can receive in federal loans.

Just be aware that private student loans are expensive, and a burden which you’ll be shouldering for ten, twenty or thirty years after you graduate. Do plenty of research to find the very best interest rates and terms that you can; that will save you thousands of dollars down the road.