Private Student Loans

Private student loans are offered by private organizations including banks, credit unions, schools and state agencies that have changeable terms and conditions that are established by the lender.

Because they tend to be more expensive than federal loans, private student loan interest rates are typically high and make the loans riskier to obtain. However, private loans may be beneficial to some college students who have exhausted other means of financial support.

The following sections outline the difference between federal vs private student loans and gives students in the process of searching for loans the ability to select better loans from private sources. Since finding funding options for college is so important, students are encouraged to review the information provided in the sections below before deciding to accept loans to locate the best rates possible.

What is a private student loan?

Basically, private student loans are loans awarded to students attending qualifying secondary institutions. Although private loans are more common to cover personal costs such as vehicles, homes or other expenses, many students also rely on private institutions to help cover tuition fees. In fact, loans from providers like Sallie Mae have been funding undergraduate and graduate students for decades and even offer loans to parents of children receiving private education from students in grades K-12.

Unlike federal student loans, private student loans may be more personalized and specific to students’ field of study. Though, there are numerous differences between the types of loans that may affect students’ decision to take them. The main differences between private and federal loans are as follows:

  • Federal loan payments are always due after graduation, whereas private loan payments are sometimes due during school.
  • Federal loans have fixed interest rates, but private loans may have variable rates.
  • Federal loans are often subsidized, while private ones are typically unsubsidized, meaning that the borrower is responsible for all interest on the loan.
  • While federal loans do not require credit checks, some private loans may require borrowers’ credit history or a cosigner depending on the amount of the loan.
  • Private loans cannot be consolidated like federal loans, but they may be refinanced.
  • Prepayment fees may apply to private lenders, but federal lenders do not impose prepayment penalties.

However, both loans may offer students tax-deductible interest and lower payment plans. Additionally, the loans are managed similarly in that students must contact their loan servicers directly to resolve issues, change repayment plans or postpone payments.

Related Article: Direct Subsidized Loans

Generally, private student loans are offered as a part of a school’s financial aid package and may be requested from other sources, and federal loans are received after students complete the free application for federal student aid (FAFSA) for the current school year. Due to the countless private loans available to new and returning students throughout the U.S., the process of requesting these loans may vary greatly depending on the lender.

How to Get a Private Student Loan

To apply for private student loans, students are encouraged to research possible institutions or organizations that may distribute loans to them. For instance, students in search of private graduate student loans may contact their university or financial institutions that offer graduate loans for master’s programs. Based on their area of study, students should contact certain lenders to begin the application process. The steps involved in securing a private student loan from lenders throughout the country are as follows:

  1. Research your loan options. You should compare private student loans in terms of application fees, repayment amounts and periods and interest rates to ensure you are receiving the best deal.
  2. Find a cosigner (if necessary). Because private loans require credit checks, you may need a reliable cosigner who can vouch for your repayment ability if you have bad or little credit.
  3. Determine important deadlines. If your school requires tuition payments early, you should find and apply for loans as soon as possible to avoid submitting late tuition payments.
  4. Collect all required documents for loan applications. Although applications for private loans may differ, you should have access to your financial and personal information when completing applications.
  5. Complete and submit the application form. Applications may be accessible online via the lender’s website or in person at the institution to which you are applying for loans.

Applicants must fully review all applications and agree to the terms and conditions specified in them to proceed with the application process.

Note: Students are only advised to apply for private student loans after they have filed their FAFSA applications and received all possible federal student aid. If they still cannot afford to attend their college, then they may rely on other loans.

Advantages of Private Student Loans

Private student loans may offer students great advantages including financial benefits and flexible deadlines. A list of potential benefits students may receive with their private loans is available below:

  • Interest rate discounts.
  • Unlimited loan distributions.
  • Extra discounts such as those for good grades or making automatic payments.
  • Shorter application process and quicker fund disbursement.

Students are encouraged to consider these benefits and ask their loan providers if they may qualify for them before accepting loan offers.

Disadvantages of Private Student Loans

When choosing between federal and private student loans, students should consider the disadvantages of each loan. A list of potential disadvantages students may encounter when applying for or maintaining a private loan is available below:

  • Required credit check with good credit rating. Cosigners and credit scores of 720 or higher may be requirements for some private lenders. You should check the loan requirements to determine your eligibility.
  • Variable, and higher, interest rates. According to CNBC, the average private student loan interest rate (variable) was 7.81 percent in 2017 with the averaged fixed rate at 9.66 percent. Federal loans have fixed interest rates of 7.6 percent and below.
  • No deferment or forbearance. You may be required to make payments while still enrolled in school and may not qualify for financial hardship under private plans.
  • Less flexible repayment plans. Repayment plans enable students to adjust their monthly payment based on their income or other factors, but private loans may prevent them from changing their payments due to financial difficulties.

Despite the disadvantages associated with taking a private student loan, they are still viable options for students who are struggling financially.

Related Article: Federal Student Grants

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