Cosigning private student debt in not a simple decision. Cosigners need to consider their own financial objectives and circumstance before signing that promissory note. After graduation, the process of student loan consolidation and refinancing may allow you to release your cosigner.
In general, cosigners will need to make at least $25,000 annually and have good credit (above 680 FICO score). Moreover, cosigners must not have a debt-to-income ratio above 40%. When you agree to cosign a student loan, your credit will be checked during the application process.
Once you’ve been approved for a private student loan, the lender will verify your enrollment and cost of attendance with your school. In general, private educational debt is disbursed directly to the school. These funds will then be credited to your account at your school. If there is money left over, the school will issue you a check for the difference. Some schools even allow students to electronically transfer extra funds to their bank account.
Most PSL lenders give you a choice of a few repayment options while you are in school. Popular options include:
Furthermore, many lenders even offer discounts if you make payments while you are in school.
Depending on the option you select, you may be required to make payments while you are in school. Most students choose to defer all of their payments during school. Meaning, no student loan payments are required while you are taking classes. That being said, students who elect to pay interest only payments during school will save thousands of dollars on average.
By paying your interest in school, you avoid compounding interest charges. Furthermore, many lenders even offer discounts if you make payments while you are in school.
The best student loans will come standard with 10 or 15 year term lengths. Your term length is the period of time you choose to repay your loan. The longer the term length, the lower your monthly payment, and higher your interest rate. The opposite is true for short term lengths.
You will have a short period of deferment after you graduate. After your deferment period ends, you will be required to make monthly principal and interest payments. Reputable lenders will not charge you fees to make additional principal payments. So if you want to pay off your private student loans quickly, you can do so without additional fees.
Making PSL payments is easy. Most students elect to make their payments electronically. Most lenders offer a 0.25% discount for making electronic payments. Setting up electronic payments is easy and can be done in less than 15 minutes.
Private Student Loan Servicers
Student loan servicers are your main point of contact regarding your loans. Your servicer will:
- Accept your payments
- Help decide optimal repayment plans
- Assist you with any general questions regarding your loans
- Help you in times of hardship
Student loans can be complex. From interest rates to loan terms to the companies that handle your loans, it can be confusing to know exactly what is going on with your loans. When you have private student loans, you probably have frequent contact with your loan servicing company. Learning how to work well with your loan servicer can help to ensure that you stay current on your student loans and manage your debt in the best possible way.
Student loan servicers work on behalf of the bank or other private lender that provided the money for your education. The loan servicing company essentially makes sure that your loans are being paid, by collecting and keeping track of your payments. They are responsible for managing your student loans. They work with you to help them stay on top of your student loan debt. If deferment or forbearance is an option under the terms of your private student loans, you will need to talk directly to your student loan servicer — not the lender — to discuss applying for these plans. When you apply for a private student loan, you are assigned a loan servicer by the lender.
Finding out who services your private student loans can be as simple as looking at bills that may come in the mail each month. If you do not receive paper bills from your student loan lender, you can find out who services your student loans by requesting a copy of your credit report. You are entitled to a free credit report each year, which you can obtain from one of the three major credit reporting agencies.
You can use the servicer’s website to determine how much you debt you have, how much interest has accrued and to make sure that you are on top of your payments. You can also contact your servicer to discuss issues that you may be having. For example, if you recently have become unemployed, you can contact your servicer to discuss forbearance or deferral options for your private student loans. In many cases, by signing up for an account with your student loan servicer’s website and enabling automatic payment, you may be eligible for an interest rate reduction.
Working with private student loan servicers can require a fair amount of patience, and attention to detail. Student loans can be complex, particularly given that many borrowers have more than one loan. Many students have had difficulty working with their student loan servicers, complaining that payments have not been credited to their accounts or that paperwork has gone missing.
Working with student loan servicers requires that borrowers keep careful records of all payments made and that they maintain their composure during contacts with their servicers. Keep careful notes of all conversations that you have, and make a note of who you speak to, and when you speak to them. Always be polite and courteous when on the telephone with your student loan servicer. Be sure to have copies of your student loans on hand, which can be obtained directly from your student loan lenders. If you do not have copies of your loans and other documents regarding your accounts, request them from the servicer or the lender.
Your private student loan servicer acts as the middleman between you and your borrower. Maintaining a good relationship is often critical to keeping your student loans in good standing and ensuring that you can pay off your student loans in a timely fashion. If you do have concerns about how your student loans have been serviced, consider contacting the Consumer Financial Protection Bureau to register a complaint.
Differences Between Federal Student Loans and Private Student Loans
When it comes to paying for college, most students will have to take on some form of debt. There are two forms of loans that most students will consider: federal and private student loans. Understanding the difference between these two types of loans — including the advantages and disadvantages of each — is the key to making a smart choice about your financial future.
Federal Student Loans
Federal student loans are generally considered to be the best option for most students. They offer a variety of protections for borrowers, such an income-based repayment plans, forbearance, and loan forgiveness if you work in certain fields. Federal student loans are not based on credit worthiness and do not require a cosigner. Federal student loans are offered at a fixed interest rate, and have specific limits on the amount that can be borrowed each year for undergraduate and graduate school, and a lifetime limit on total borrowing.
Federal Student Loan Benefits
There are a number of different types of federal student loans, each of which has its own benefits. Direct subsidized loans, also known as subsidized Stafford loans, are for undergraduate students with a demonstrated financial need. Borrowers are not responsible for any interest that accrues while they are still in school. On the other hand unsubsidized Stafford loans are available to both undergraduate and graduate students. These loans are not based on financial need, and they do accrue interest while borrowers are in school.
Other Types of Federal Student Loans
In addition, the federal government offers PLUS loans to graduate and professional students and to parents. These loans are based on a borrower’s credit score. Grad PLUS loans do not have limits, and can be used to pay for either graduate or professional loads. Similarly, Parent PLUS loans can be taken out by parents to pay for undergraduate education for dependent children. There is no limit on the amount of money that can be taken out for these loans, but parents must have a solid credit history to qualify.
Private Student Loans
When federal student loans are not sufficient to cover the cost of higher education, many students turn to private student loans. For parents and students with good credit, private student loans are often available at interest rates that could potentially be lower than those offered by the federal government.
Private student loans can have either fixed or variable interest rates. Fixed interest rates have interest rates that stay the same over the life of the loan. Variable rates, on the other hand, change based the London Interbank Offered Rate, or LIBOR. The interest rate charged for a private student loan will depend on the creditworthiness of the applicant.
Interest on private student loans acrrues while the borrower is still in school. As a general rule, deferral, repayment and forbearance options are less generous with private student loans than with federal student loans. For this reason, most financial experts recommend that borrowers who require student loans look to federal student loans as a first choice. If federal loans are insufficient to pay for your college or graduate school, compare options for private student loans.
As a general rule, applicants under the age of 25 will require a cosigner in order to qualify for a private student loan. A cosigner will be responsible for repaying the student loan in the event that the primary borrower defaults on the loan. Typically, a family member or close friend with a strong credit score cosigns a loan for a student applicant. A student generally does not have enough of a credit history to qualify for a student loan; lenders are not willing to take the risk that the student will be able to pay back the loan. A cosigner allows the student to qualify for the loan, and will often enable the student to obtain a lower interest rate. After a borrower has graduated and has made a certain number of on-time payments, he or she may qualify for a cosigner release.
Best Student Loans for Parents
Many parents start saving for their child's education before the he or she can speak. Starting early is definitely a smart strategy and the earlier you start, the more likely you are to save up. Often, however, parents cannot fully cover the cost of a higher education with this saved money in addition to their incomes. When parents still want to support their child's education, they might choose to take out loans in their own names. This way, the child will not have to graduate with debt and can start their real financial career in the green.
There are many lenders who allow parents of students to take out loans in their own names as opposed to just having them cosign on a loan in the name of their child. Furthermore, taking out a private loan as a parent may provide better interest rates as compared to having a student take one out, even if a parent cosigns. As mentioned above, private student loan eligibility and interest rates are determined based on creditworthiness. As you may expect, parents almost always have better credit scores than their children, who may have no credit history at all.
The process of applying for and receiving private student loans as a parent is, in most cases, the same that a student would go through. Parents still need to submit paperwork to the lenders so they can pull their credit. Like when a student takes out a loan, the funds will typically be sent directly to the school. This is done so the funds are only used for school purposes and nothing else.
Risks of Private Student Loans
- Generally higher interest rates than federal student loans
- Less benefits than federal student loans
- Interest generally accumulates while student is still in school
- Cannot be discharged in bankruptcy
- Credit will be damaged if payments are missed
Students should always use federal student loans and other forms of financial aid before considering student loans offered by a private bank. Before signing that promissory note, you should know that privately issued student debt does have risks.
Like other types of loans, privately issued educational credits do need to be paid back with interest. If you elect to defer your student loan payments while you are in school, the interest owed will accumulate and be added to the balance of the loan. If you let you interest accumulate and capitalize for too long, you might find yourself owing much more than you had originally planned.
Soon after graduation, you will be required to start the repayment of your loans. If you cannot repay your college debt you put your credit at risk. Missed payments or late payments equates to negative marks on your credit. Before taking out student loans of any kind, you should judge your ability to repay your debt after graduation.
Unlike other types of consumer debt, privately issued financing cannot be discharged during bankruptcy. Meaning, you can’t escape privately issued debt.
Federal student loans come with many built in borrower protections such as income based repayment. Private student loans usually come without income based repayment options, and forgiveness options.