Most students turn to federal grants, scholarships, and student loans first to fund their graduate studies. But for millions of young adults, that’s not enough to cover their school’s full tuition, so they turn to private student loans.
These are student loans issued by private banks instead of the federal government. Unlike federal student loans, which offer the same interest rates and terms to every student borrower, the terms of private student loans vary from company to company. Here’s a more in-depth look at the factors to consider when choosing a private student lender.
Interest rates are a major concern with any loan because they affect how quickly your balance grows and the overall amount you pay off. Federal student loans offer the same interest rates to all student borrowers, but private student lenders base your rates on your creditworthiness.
It’s common for lenders to advertise their lowest interest rate, but only applicants with the best credit (or a co-signer who has great credit) will actually receive that rate. Yours may be higher. Some companies let you find out if you are prequalifying for a private student loan and check their website to see what your interest rate would be. For others, you may need to submit a request to find out what a lender can offer you.
Interest rates can vary from less than 5% to more than 12%, depending on the lender and your credit. It’s best to compare the rates of a few private student lenders before you decide, so you know you’re getting the best deal.
Try to submit your applications within a month if you can. Lenders will do a thorough investigation of your credit report, which can lower your credit score by a few points. But credit scoring models consider all credit inquiries that take place within a 30-day period as a single inquiry that takes into account normal credit buying behavior.
Some private student loans charge an origination fee, which helps cover the loan processing costs. This is usually a percentage of your total loan amount, and it’s built directly into your loan balance. This means that you won’t actually get the full amount you are asking for for your college expenses because the lender makes sure they get paid first. Not all private student loan lenders charge an origination fee, but if yours does, the amount you pay will be determined by how much you borrow and your creditworthiness.
Private student loans may also charge a fee for:
- Late payments
- Returned payments
- Default on your student loan
- Put your loan on hold or forbearance
- Prepay your student loan early
Before agreeing to the loan terms, ask the lender for a copy of their fee schedule and review it. Origination fees and late payment fees shouldn’t set off too many alarm bells, but if the company is trying to pay you a dime for every little thing, you better stay away from it. lender. Then, just like you did with interest rates, compare the fee schedules of several private student lenders to determine which offers the most affordable loans.
Many private lenders require student borrowers to have a co-signer. Young adults often don’t have a great credit history, which can leave lenders in the dark about how they will manage their money. If they can’t keep up with the payments, lenders could lose money, so they need a co-signer – often a relative, but it can be anyone – who is willing to vouch for the loan. reliability of the student and to support payments if the student is unable to do so.
Some lenders may allow you to subscribe to a student loan without co-signer, but you will likely pay a higher interest rate to reflect the increased risk to lenders. If you’re trying to keep costs down, you’d better co-sign with someone who has a good credit history, if possible.
If your co-signer is worried about having to pay off your student loans, find a private student loan lender that offers release of the co-signer. Each lender has their own conditions that you must meet to be eligible. In most cases, you must have a sufficiently high credit rating when applying for your release and must have made a certain number of student loan payments on time. Some lenders may also have income requirements. Check the co-signer release policy if you are interested in pursuing this.
Private student loans are not known for their flexible or generous repayment terms. While you’re still in school, your options might be to make fixed monthly payments, make interest-only payments (to keep your balance from bloating), or defer payments altogether. But once you leave school, you usually have no choice but to pay the fixed monthly amount.
There is no income-based repayment plan that ties your monthly student loan payments to your income, like those offered by the federal government. This can increase your risk of default, which can hurt your credit and make it difficult to get new loans in the future.
Ask the lender how much your monthly payments will be before agreeing to the terms of the student loan and make sure you are comfortable paying that amount. You should also know if the loan offers alternative repayment plans for borrowers who cannot follow its standard repayment plan. If you fall behind on your payments in the future, contact your lender and discuss your options.
Adjournments and abstentions
Adjournments and abstentions can both temporarily suspend your student loan payments without the risk of late fees or default. Typically, you must meet certain criteria to be eligible for a deferral, while withholdings are at the discretion of the lender. Forbearance is usually allowed for up to 12 months, while deferral may be allowed for longer, depending on what your lender allows. Either way, your balance will continue to accumulate interest unless you pay at least enough to cover the interest charges for each month.
Many lenders offer postponements to students while they are still enrolled in a qualifying university, while others offer postponements or abstentions to those experiencing financial difficulty after graduation. But every lender is different, and some may not offer any deferral or forbearance options.
You might think you won’t need to use them, but if you’re struggling to find a job after you graduate, deferring could save you from default. Check with your private student lender to see if they offer deferral or forbearance opportunities, and what qualifications you must meet to be approved for them.
Look at the whole picture
Many students focus only on price when choosing a private student loan lender, but if that lender does not offer flexible repayment terms, deferrals, or co-signer release, you or your co-signer could find yourself in dire straits. financial difficulty if you are unable to pay your monthly payments. You might be better off paying a little more to work with a private student lender that offers borrowers more flexibility, but that’s up to you.
Consider which of the above factors are most important to you and focus on those first when choosing a private student loan lender. Don’t hesitate to ask the lender any questions you may have about their services or fees. If he can’t give you a clear answer or seems evasive, you’ll probably want to walk away. Don’t sign on the dotted line until you know exactly what you’re getting.