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How to shop for private student loans
Private student loans can be a good option for students who have already exhausted their federal loan options. However, rates and fees can vary significantly from one lender to another. So it pays to compare lenders before choosing a private student loan. This guide will teach you how to compare student loans so you can find the best deal possible.
What are private student loans?The main difference between federal and private loans is the administrator. A federal loan is offered through the federal government while a private loan is offered by a private company or bank.
But that's not the only difference to know. Here are some key features of private student loans and how they differ from federal loans:
Compare the features of private and federal student loans.
- Issued by private student loan companies
- You can shop around and compare a variety of lenders
- You don't need to fill out the FAFSA form to get them
- Require a credit check and often a cosigner
- Offer variable and fixed interest rates
- Don't offer access to income-driven repayment plans or loan forgiveness programs
- Issued by the U.S. Department of Education
- Only one lender from which you can choose
- You need to fill out the FAFSA form to get them
- Most loans don't require a credit check or cosigner
- Offer fixed interest rates
- Offer access to income-driven repayment plans and loan forgiveness programs
Private student loans are student loans issued by private lenders (rather than the federal government). To qualify, you'll need to present a healthy credit score and steady income source -- or, failing that, a creditworthy cosigner. When you take out a private student loan, the interest rates and terms you qualify for depend on your creditworthiness.
Why might you get a private student loan?
There are limits on how much you can borrow with federal student loans. If your tuition exceeds that limit, private student loans can make up the difference.
Also, federal student loans can be withdrawn if you fail to maintain a 2.0 cumulative GPA. Private student loans, on the other hand, are not reliant on academic success.
Alternatively, you might pursue a private student loan in order to consolidate several disparate pools of student debt. These "consolidation loans" can streamline a disorienting tangle of payments into a single easy monthly payment.
What should you consider when you compare private student loans?
There is an enormous online ecosystem of private student loan lenders, and as such, loan offers vary widely in their rates and terms. When you compare private student loans, consider the following factors:
What are the eligibility requirements for private student loans?
The requirements of private student lenders vary widely. For example, you may need to be enrolled in an eligible school, or you may have to meet certain age, education, or citizenship requirements.
Also, unlike some federal loans, most private student loans require a credit check. So before you get excited about a lender, make sure that your credit meets their standards (or that you have a qualifying cosigner).
How do you compare private student loans?
Here is a list of the rates and terms you should consider when comparing student loans.
- Type of lender
- Interest rates
- Origination fees and other additional expenses
- Borrower protections
- Eligibility requirements
- Consumer reviews
What are the rates for private student loans?
There are two types of private student loans: fixed-rate loans and variable rate loans. Some lenders offer both types, while others stick to just one.
With a fixed-rate loan, interest rates remain constant for the life of the loan. As such, they offer stability and are advantageous when market rates are low.
Variable-rate loans often feature very low introductory interest rates, but those rates fluctuate based on market conditions and other factors. These loans could potentially save you more money, but they come with risks. You should only take one if your savings could support a spike in interest further down the line.
When you compare private student loans, keep an eye on the type of interest they offer, as well as the specific interest rate. After all, your interest rate is the percentage of the total loan that you'll have to pay to your lender. In other words, it determines the cost of your loan.
What are the fees?
Every loan comes with fees, often hidden in the fine print. And fees can increase the cost of an affordable student loan fast. So when you compare private student loan offers, make sure to read every detail to find out what fees the lender charges. Plus, keep an eye on how high those fees are.
What are origination fees?
Most lenders charge an origination fee when they send you your money. Origination fees reduce the amount of money you receive but not the amount you must repay. As such, if you want to save money, you should seek out a lender with low or no origination fees.
Do they charge application fees?
Application fees must be paid at the time the loan application is submitted. These fees are often non-refundable, even if your application is denied.
Not all lenders charge application fees, but many do. Be careful not to waste too much money paying for expensive application fees for loans you likely won't qualify for. Instead, do your research and apply to lenders who accept applicants in your circumstances.
Do they charge early termination fees?
You might think that paying off your student loans early would be a good thing. In part, you're right: it's great to get out of debt, and shortening your loan term can also shorten the loan's overall costs. However, when borrowers pay off their loans early, lenders lose money. As such, many charge early termination fees as a penalty to borrowers who shorten their loan terms.
If you think there's a chance you'll be able to pay off your loan early, seek out a lender with low or no early termination penalties.
What is the repayment term?
The length of your repayment term affects both the cost of your monthly payments and the overall cost of the loan.
A longer loan term means lower monthly payments, but it also means a higher cost overall. On the other hand, a shorter loan term means you'll save more money overall, but your monthly payments will be higher. Therefore, you should shoot for the shortest term you can still comfortably afford your monthly payments.
A student loan can follow you for years -- sometimes decades -- after the day you originated the loan. And your circumstances can change a lot during that time. For example, you could end up unemployed for longer than anticipated or could take a salary cut in an unexpected career change. That's why you must find a lender who is willing to work with you through the unexpected.
Do they offer loan deferment?
Does your lender allow in-school deferment (wherein you can skip payments on your loan as long as you're enrolled in a qualified undergrad, graduate, or co-op program)? Do they offer a grace period (usually six to nine months) after graduation before your first payment is due?
Do they offer loan forbearance?
"Forbearance" is the ability to skip monthly payments without the threat of going into default. Keep in mind that generally speaking, even if your lender does allow forbearance, interest will continue to accrue during the forbearance period.
If you undergo a hardship, will your lender allow you to file for hardship forbearance? Or do they offer volunteer or work-related deferment, wherein you can skip loan payments by taking certain eligible jobs or volunteering for eligible organizations?
And if your lender does allow for forbearance, will you have to pay the interest that you accrued on your next monthly payment? Or will they merely append it to your outstanding balance?
What are their loan cancellation terms?
Some lenders will even cancel some or all of your loan if you take a certain job. For example, teaching in certain areas, or taking a particular assignment as a nurse, may entitle you to loan cancellation.
If you're worried about finances in your future, you can seek out a loan that advertises loan cancellation. Then, when you've graduated from your program, simply take the job which entitles you to loan cancellation. If a lender offers this, it can be hugely advantageous to the borrower.
In general, when you compare lenders, seek out a loan offer that reflects your intended post-graduation trajectory. And make sure that they are willing to cooperate with you in the case of a crisis. Finally, to confirm that they're as flexible as they say, read unbiased reviews from past or current borrowers. These will give you a more honest look at what to expect from your lender.
Consumer reviews - What is their customer service like?
Since you'll be paying back your student loans for a long time, you want to know that your lender is open and honest. Look for a lender that will work with you in moments of crisis and be accessible and communicative when you need to report a problem. Online portals and autopay systems are also great assets for managing your payments.
The best way to confirm that a lender offers good customer service is to read honest reviews from past customers. Learn about others' experiences to find out what to expect from a given lender. If many past (or present) customers report the same issue with a given lender, the odds are good that you'll encounter the same problem.
How to pick the right private student loan
Every student's situation is different. Therefore, students and families need to develop a financial plan that fits their needs. It's also important to consider the other terms and features. For example, if you need a cosigner, you'll have a better time convincing someone to do it if your chosen lender has a generous cosigner release program. And if you don't need a lot of funds, you could save money over time by picking a lender that offers shorter repayment periods. Also, consider whether a lender has any other special features. For example, some lenders offer cash bonuses when you graduate, and others offer interest rate discounts on other loans.
So you'll want to take the time to consider whether private student loans are right for you and which lender to choose. By doing so, you'll have an easier time paying down your debt after you graduate. And if interest rates are lower when that time comes, you can choose to refinance your student loans to take advantage of the new rates.
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 or change my repayment period if necessary?
- 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 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. 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: the 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 cosigner. A cosigner 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 cosigner; 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 and 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 those 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:
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.
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 (source).
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. Don't forget that if you have a cosigner, failure to pay on time will hurt their credit as well.
Putting it all together
When you compare private student loans, you'll need to consider all of the above to find the perfect loan. The right choice for you depends on your circumstances. Do you want to prioritize lower monthly payments or more savings overall? Might you pay off your loan early, or do early termination fees not matter to you? Do you have good credit or access to a creditworthy cosigner? Are you worried that you might have to defer your loan while you hunt for work?
To find a lender who offers the features you need, you'll have to do your research. But don't worry: SuperMoney makes it easy. Check out our private student loan reviews page to compare interest rates, loan terms, and fees side-by-side from a ton of top lenders.
Or, if you're looking for a consolidation loan, check out these student loan refinancing lenders. You can even use our student loan refinancing engine to pre-qualify for a ton of different offers. It only takes a few minutes, and it won't hurt your credit score!