Deciding to go to college or university is a major life decision, one that requires a lot of thought and planning. And if you are a student fresh out of high school, it is probably your first significant capital investment. One of the biggest challenges that students face is financing their education. How are you going to pay for it?
On average, public university tuition costs $26,300 for a four-year degree program, while the average private university costs $100,500 over the same period (source). While grants and scholarships may cover a portion of those fees, it’s inevitable that you will have to borrow some money to fund your education.
There are two categories of student loans—federal government loans and private lender loans—and it is likely you will need a combination of both to cover the full cost of your tuition. Private lender loans for students have been increasing steadily since the 1990’s, and now make up about 7% of the overall student loan market (source). This follows the upward trend of rising tuition costs.
Federal government loans are fairly simple to access. But how do you properly pursue a private student loan?
The private student loan checklist
Private lenders have slight differences in their application and disbursement processes, but they follow the same format.
Step 1: Research
There are a large number of private loan lenders available in every state, and they all offer something to somebody. As a student, it’s important to look closely at a variety of lenders to ensure you are finding a good fit. Some helpful questions to ask:
- Does this lender offer variable or fixed interest rates? Both?
- Is there a lower interest rate while I am attending school?
- Is there a cap on variable interest rates?
- Can I extend/change my repayment period if needed?
- Is there job loss protection available with this loan?
These are just a few of the questions to keep in mind when researching potential lenders. Keep in mind that not all lenders will loan out to all students. For example, Commonbond only lends to MBA students, and only if they are attending one of 20 specific schools.
It is crucial that you have a good idea of exactly what you are getting into. Remember, this is likely going to be a long-term relationship; most loans have repayment periods of up to 20 years! Look at comparisons between different lenders to help you choose your top picks, and keep a list of which application forms you are interested in filling out.
Step 2: Application Form
This form is where you provide information that a private lender needs to determine whether you qualify for a loan. The required information varies, but includes these basics:
- Contact – address, phone number, email
- Personal – date of birth, Social Security Number, yearly income, etc.
- School – institution, enrolled program, expected graduation date, etc.
- Cost – cost of attendance, requested loan amount
These applications are often available online and don’t take very long to complete. Traditionally, lenders charged an application fee, but newer companies like Sofi are shifting away from those additional charges.
Your application information will help a private lender determine your eligibility for a student loan from them. It also allows them to run a credit history check on you, which is a requirement for loan approval.
Step 3: Approval
If you have a high credit rating, you have a better chance of success when applying for a student loan. Your rating is determined by your credit report, which is essentially your total financial history—bill payments, current debt load, and whether you’ve ever been sued or filed for bankruptcy, among other things. (source)
If you are a young person, or simply don’t have much financial history, your credit rating will naturally be low. This is why most students are approved on the condition that they have an eligible co-signer.
A co-signer is somebody with good credit history and steady income that takes equal responsibility for repaying your loan. Often this is a parent or family member, but can be anybody that you have a close, trusted relationship with. Keep in mind that this person is taking a risk by agreeing to be your co-signer: any payments you miss on the loan will affect the good credit rating they have worked hard to build.
Once you are approved for the loan, it’s time to work out the details.
Step 4: Accept & Sign
The repayment terms of a student loan can vary greatly between private lenders, so it’s important to thoroughly understand your needs and how the terms line up with them.
Remember the questions you asked while researching different private lenders? Refer to these when going through the loan terms. A lender is required to lay out all of the terms of the loan in writing; this is called disclosure.
Once you’ve agreed to the terms, there are two more important forms to complete:
Promissory Note: This contains all of the agreed upon terms of the loan, and constitutes a written promise to repay the loan according to those terms (source). It lands somewhere between the informality of an IOU and the rigidity of a legal contract, but it is a binding promise.
Self-Certification Form: This form is sent to your school once you have agreed to the loan terms. It confirms several things, such as your enrollment details and expected graduation, but most importantly it confirms the cost of attendance. If your loan exceeds attendance costs, the school can lower the amount you receive. If this happens, the lender will need to generate a new disclosure to you, and you may need to sign new loan documents. (source1)
Step 5: Disbursement
Congratulations! Your school has approved the loan, and you’ve signed all of the necessary documents. The next step doesn’t require anything of you, the student. The lender will send the money to your school’s financial office by a certain date, and the money will be applied directly to your tuition. If your loan is meant to cover two separate semesters, it will likely be disbursed on two separate dates.
Step 6: Repayment
The final step is repaying the money that you’ve borrowed, and how you do this is set out in the terms of the loan. Again, some lenders have more flexibility than others when it comes to repayment.
The most important thing to remember is to pay your monthly bill on time.
Failure to do so could have seriously detrimental effects on your credit rating, and your ability to take out new loans in the future. And don’t forget that if you have a co-signer, failure to pay on time will hurt their credit as well.
Private vs. Federal
As mentioned, it is likely that you will need to carry both private and federal loans, and it’s important to understand the pros and cons of both. While there are some differences, the gap is closing; new private lenders are challenging conventional practices and becoming less rigid.
Federal student loans typically have a fixed interest rate; whatever the rate is at the time you borrow is where it will stay over the course of the loan. Private loans, meanwhile, can offer a fixed interest rate or a variable one that will fluctuate over time, sometimes even month to month.
While the variable interest rate can increase your monthly payments, lenders like Sofi have introduced caps, meaning the variable interest rate can only rise to a certain extent.
These vary widely from lender to lender, and even different federal loans have different policies. But federal loans do have some features simply not offered by private lenders. For instance, some offer debt forgiveness if you pursue a civil service career, or tie monthly payments to your monthly income. However, the consequences of defaulting on federal loans can be quite serious, such as wage garnishing and confiscation of tax refunds. (source)
For information about refinancing your student loan, check out this helpful article.
Private lenders are offering more and more flexibility when it comes to repayment, and are open to extending the loan period if there is room. Many now offer job protection that will pause payments until you find new work, and discounts on your interest should you enable automatic payments.
Again, you will likely be borrowing from both the government and private lenders. Do your homework, do the math, and figure out which options will best meet your needs.
A 2011 study by Pew Research Center found that 57% of Americans think college education does not provide good value for money. And 75% feel that college is too expensive for most Americans to afford. However, 86% of Americans still feel that college was a good investment for them personally (source).
Post-secondary education is an investment in you and your future. Taking the time to determine your needs and then finding a lender that can meet them will only benefit you in the long run. Companies like Lendkey offer a great resource for connecting with lenders in your community.
If you are a Master’s or Ph.D. student, or a graduate with high-interest federal loans, a private lender such as Upstart may allow you to refinance at a much lower interest rate.