Private student loans can be used for most types of education.
You’ll find lenders offering loans for undergraduate degrees to graduate, certificate, and health profession programs.
The problem is, choosing the right loan package can be challenging, especially since you have to consider many things.
These include the interest rates, repayment terms, and your financial situation.
This guide aims to help you figure out how to take out a private student loan that’s right for you.
When Should You Take Out a Private Student Loan?
Private student loans are considered supplemental funding for education.
Therefore, students should only consider getting one if they have maxed out the financial aid provided by the government.
That said, before you entertain the idea of getting a private student loan, make sure to check if you qualify for federal student loans.
You can do this by simply filling out the Federal Application for Student Aid (FAFSA).
Once your application has been processed, you will receive an award letter that contains all the financial programs available for you, including subsidized and unsubsidized student loans.
These loans are offered by the U.S. Department of Education and typically come with low-interest rates and flexible repayment plans.
If you’re qualified, you may also be offered scholarship grants and work-study opportunities.
The next step is to examine whether your federal student loans are enough to support your studies.
What if, after exhausting all your federal student loans and free money options, you realize that they’re still not enough to cover the costs of your education?
Only then can you consider taking out a private student loan.
You can use a private student loan to fill the funding gap for various expenses, such as your tuition fee, books, supplies, transportation, lodging, and more.
You may also use it to pay for summer classes if you’re looking to speed up your education and start earning soon or cover unexpected expenses while studying.
How To Take Out a Private Student Loan
To give you a better chance of actually getting approved for a loan, follow these steps when applying for a private student loan:
Step 1: Check your eligibility.
Banks and other financial institutions offer private student loans.
This means that their eligibility criteria are mostly based on your credit profile.
Like with all forms of private loans, lenders need to know whether you are a trustworthy borrower.
Of course, the only way to know this is to check your credit history.
Most private lenders will ask you to have a co-signer, as most students don’t have enough income or sufficient credit history yet to prove their eligibility.
Having one will give you a better chance of getting approved for your student loan application.
In addition to helping you qualify for a loan, a co-signer with a good credit rating also gives you a better chance of getting a lower interest rate.
Do note, however, that you and your co-signer are equally responsible for your student loan.
That said, the private lender can demand payment from your co-signer if you are unable to make monthly payments on time.
Step 2: Check the school and program eligibility.
The school you plan to attend must meet the private lender’s eligibility requirements too.
Primarily, your chosen school or university should be on the lender’s list of approved institutions.
In addition, you may need to prove that you are at least a half-time student taking an associate degree.
If you are taking a post-graduate degree, there might be additional requirements.
Lastly, some lenders may also require you to obtain a school certification.
This verifies your enrolment and ensures you’re not getting more loans than you need.
Step 3: Determine the kind of student loan you need.
After factoring in all the financial aid you’re getting from the government, the next step is to decide how much you need.
Private student loans come in several forms, from undergraduate loans to graduate, career, and parent loans.
Thus, make sure you select the policy that is most suitable for your needs.
You should also know that private student loans don’t have the same limits as federal ones do.
That said, the maximum loan amount you can get varies from one lender to another.
Some companies allow students to borrow up to $200,000 or more.
In most cases, you will not need this much since you most probably have one or two types of federal financial aid already.
Stick to the amount that’s just enough to fill the “funding gap” in your education so that you won’t have a more difficult time repaying your debt.
When it comes to interest rates, student loans for post-graduate degrees and career programs are usually higher.
Step 4: Read the fine print before you sign.
One common mistake that many student loan borrowers make is not reading the terms and conditions of their loan contracts.
Unfortunately, this often leads to misunderstanding and costly surprises in the end.
Therefore, before you and your co-signer sign the contract, make sure you’ve understood every provision stated.
It’s best to talk to your chosen private lender to clarify terms you do not understand, as loan contracts can be very tricky and confusing.
When going through the terms and conditions of your private student loan, some of the things you should keep an eye on are the following:
Interest Rate
Does the interest rate of your loan stay the same throughout its term, or does it change?
Remember that private student loans typically have higher interest rates, ranging from 3.34% to 12.99%.
Variable interest rates are usually lower when you start repaying your debt.
Still, it would help if you consider your personal tolerance for the possibility that it could go up throughout your repayment term.
Repayment Plan
The contract should also specify your repayment options.
You have to understand, however, that private student loans have limited repayment plans.
In most cases, you have to start repaying your loan as soon as possible.
This can mean making monthly payments while you’re still in school, which can be incredibly challenging.
Talk with your lender about your repayment options.
Remember that the longer your loan sits, the more expensive it gets.
Thus, it pays to choose a shorter repayment plan.
Nevertheless, it would be best if you also consider your financial condition and how much monthly payment is most realistic for you.
Penalties and Charges
Don’t forget to check the fine print for penalties and other “hidden” fees.
Find out what happens when you miss a payment.
In most cases, your loan servicer may charge you up to 6% of your missed payment amount as a penalty.
Additionally, you should check what will happen if you cannot pay off your debt for a certain period.
Co-Signer Clause
Since your co-signer has an equal responsibility to repay the loan, you want to make sure they are protected.
It’s best to choose the private student loan that offers the most protection for your co-signer.
This includes the ability to “release” them after a certain number of on-time payments and relieve them from the debt if the borrower dies.
Step 5: Apply directly to your chosen private lender.
Once you have all the requirements ready, applying for a private student loan is relatively easy.
In most cases, you can even do it online.
Many lenders have prequalification tools or loan calculators on their websites.
Use them to estimate the interest rate and term you can get based on your credit history or that of your co-signer.
Normally, it can take about three weeks to process your private student loan applications in the best-case scenario.
Or, in case of delays, it might take two to three months.
Unlike filling out the FAFSA, there’s no deadline for filling out a private student loan application.
This means you can apply all year round, which is very helpful if you experience any unexpected costs partway through the semester or school term.
How To Choose a Private Lender for Your Student Loan
You’ll find many private lenders that offer student loans.
The key is figuring out which one can provide you with the best deal.
Here’s how you can do that:
1. Choose a reputable lender.
Start by narrowing your choices to the most reputable lenders.
When seeking loans, most students have some apprehension, given the many cases of predatory lending practices.
There are surprising borrowers with unmentioned fees, not disclosing extra charges, imposing exorbitant interest rates, and the likes.
Therefore, when choosing a private lender, look for a company with a strong track record.
Legitimate lenders can back up their claims with a large portfolio and many past clients who happily recommend them.
Make sure you do your research before choosing a lender.
Another way to check private lenders’ reputation is to visit the website of your state’s Attorney General’s office and the Better Business Bureau website.
They normally post information about known predatory lenders.
The most reputable lenders would be listed in the BBB with an A grade.
That doesn’t mean you should avoid companies that don’t have this rating, though.
Still, if they have a negative grade, then that’s a valid cause for concern.
2. Compare terms.
Private lenders have different loan packages, terms, and conditions.
For instance, some companies don’t cap the amount of money you can borrow each year, while others do.
When picking a private loan for your education, look at the overall cost, which is basically the loan plus the interest and other fees.
This should help you determine whether you’re getting an affordable loan or not.
Ask as many questions as you can until you fully understand the policy you’re getting.
Do note that apart from their available loan packages, lenders can create a customized plan for you, so don’t hesitate to negotiate.
For example, lenders routinely offer lower interest rates to borrowers who choose shorter loan terms.
Often, 10 years is an ideal repayment term for student loans and is one of the best ways to lower their costs
3. Consider loan fees.
It’s worth noting that the fees charged by some private lenders can significantly increase the cost of student loans.
A loan with relatively low interest but high fees might ultimately cost more than a loan with a somewhat higher interest rate but minimal fees.
A good rule of thumb is to choose a lender that charges no more than 4% of your loan amount for fees, as it usually equates to a 1% higher interest rate.
Speaking of rates, the best private student loans have interest rates of 0.50% less than the prime lending rate.
However, this will often be available to borrowers or co-signers with excellent credit ratings.
4. Watch out for misleading advertisements.
Unless you’ve read the fine prints of each loan package, don’t pick a private student loan based on what you see on their ads.
The reason is lenders rarely give complete details of their terms until you submit your application.
They do this to prevent potential borrowers from comparing loan products based on costs.
It’s very common for lenders to advertise the lowest interest rate they charge when, in truth, different interest rates apply to different borrowers.
Also, be wary about comparing loans based on annual percentage rates (APRs), as they are likely to change over the term of your loan.
Next Steps To Take
Once you found the right private student loan, you’ll have peace of mind knowing that you’d have enough funds to support your education.
Still, don’t forget that a loan contract is a big responsibility.
You should do your best to pay on time to avoid costly fees.
There are other things you can do to manage your student loans effectively.
You can try setting up automatic payments, exploring alternative repayment plans, reviewing grace periods, and consolidating loans (if you have more than a few).
It’s also helpful to keep track of your monthly payments so that you don’t miss any deadline, considering you have federal student loans to deal with as well.
Final Words
Now that you know how to take out a private student loan, you will have more confidence in navigating the complex world of student loans.
Always take the time to compare loans and lenders.
In this way, you’ll end up choosing the best loan package that will bring you the most savings when it’s time for you to pay it back.
