Click on a question below to jump to that section:
- What is a private student loan?
- How do private student loans work?
- What are the interest rates on private student loans?
- How long will I have to repay my private student loans?
- Are there any fees on private student loans?
- What if I can’t repay my private student loan?
- Do I have to make private student loan payments while in school?
- What are the eligibility requirements for private student loans?
- How do I apply for a private student loan?
- How do I choose a private student loan lender?
- Do I need a cosigner to get a private student loan?
- How long will it take to get my private student loan money?
- Can I refinance my private student loans?
- Can I consolidate my private student loans with federal student loans?
14 Frequently Asked Questions Related to Private Student Loans
1) What is a Private Student Loan?
In the United States, there are predominantly two ways students can borrow money to fund their higher education: federal student loans and private student loans. Those two categories make up most students’ options, although some people are fortunate enough to get a low-interest or no-interest loan from and family members.
Federal student loans come with lower interest rates because they are backed by the U.S. government – which is aiming to make college more accessible to all its citizens. Private student loans, on the other hand, are known to have higher interest rates and oftentimes less flexible terms compared to loans backed by the government, along with a number of other key differences.
2) How Do Private Student Loans Work?
With federal student loans (like Stafford loans, Perkins loans, and PLUS loans), your university will likely include your options when they send you your financial aid package – along with whatever other grants or scholarships you manage to receive.
With private student loans, you need to reach out to the private sector and apply separately from your Free Application for Federal Student Aid (FAFSA) application. That means going to banks, credit unions, other financial agencies – and sometimes schools themselves – to submit an application for a student loan.
Each lender will have their own application process and required documents, so make sure you do your research on what you’ll need to complete for each potential private lender.
3) What Are the Interest Rates on Private Student Loans?
Private student loans can have a fixed interest rate or a variable interest rate. A fixed interest rate means your interest rate won’t change over the life of the loan. A variable interest rate means that your interest rate can change, and considerably raise the amount you end up paying back at the end of the process.
Private student loans are known for usually having higher interest rates than federal student loans – sometimes reaching higher than 18%. You can find private student loans with a lower interest rate than federal student loans – but it’s likely one with a variable interest rate and for borrowers with excellent credit.
Federal student loans, for comparison, come with a fixed interest rate (meaning it won’t go up or down throughout the life of the loan) that start as low as 4.45% and go as high as 7% (PLUS Loans). Those rates are set by federal law, whereas lenders decide the rates for their own private sector loan offerings.
4) How Long Will I Have to Repay My Private Student Loans?
Unlike with federally-backed loans, private sector loans don’t come with a standard repayment schedule. It varies from lender to lender what options a borrower will have regarding how long it takes to pay the money back.
In general, many private lenders give student borrowers 10 years to pay back in full, but some lenders allow for other, more flexible repayment plans. A lender might offer a longer repayment term with lower monthly payments – but at a higher cost over the life of the loan. Another option might be a graduated repayment plan, where the monthly payments start out low and gradually get larger year after year.
If you are having trouble making your full, timely monthly payments, contact your private student loan provider and see if they can provide you with another repayment option.
5) Are There Any Fees on Private Student Loans?
Because private institutions offer these types of loans, they – and not the federal government – are in control of the fees they get to charge student borrowers.
Federal student loans always come with an origination fee, which is charged upfront and is meant to counterbalance the costs of processing the many loans that the government has to deal with. That fee is set between 1 percent and 4.3 percent, approximately.
Most of the top private student loan providers won’t charge an origination fee, but there are certainly lenders out there who will – so pay attention when you are comparing your loan options.
Apart from origination fees, there are typically late payment fees that come after the repayment period begins.
Legitimate and trustworthy private lenders usually won’t overdo it on the fees, so pay close attention (check the fine print) to all the fees that your potential loan servicer will charge, because there might be other options for you with fewer fees attached.
6) What If I Can’t Repay My Private Student Loan?
No matter what type of loan you have, missing a payment will negatively impact your credit score. Apart from that, the consequences of not repaying differ depending on if your loan issuer is the federal government or a private lender.
The federal government allows recent graduates to defer payments (including interest) for a year or more, while only some private student loan programs will have that option.
If your private lender won’t allow you to defer payments, and you start missing payments, then your loan will enter into default typically after 120 days, but it might be sooner depending on the lender. At that point, the lender can turn it over to a collections agency – which might charge a percentage of the total loan as an additional fee. Your cosigner may end up being responsible for this debt if you let it slide into default.
7) Do I Have to Make Private Student Loan Payments While in School?
This depends on the lender, but – yes – many private student loan issuers do require that borrowers make payments while they are still in attendance. Some more borrower-friendly lenders allow you to delay payments until after you graduate, or just make interest payments while you are in college.
8) What Are the Eligibility Requirements for Private Student Loans?
Each individual lender will differ, but you will typically have to be enrolled either full or part-time in an accredited institution – and some lenders may require:
- A particular minimum credit score
- The student borrower to be employed
- A cosigner
- Certain schools/majors
It is important to compare eligibility requirements before beginning any individual application process.
9) How Do I Apply for a Private Student Loan?
Private student loan applications must be submitted individually. Discover, SunTrust, and Sallie Mae, for example, all have their own applications, including different submission requirements and eligibility criteria.
Go to your preferred lender’s website to begin the application process.
10) How Do I Choose a Private Student Loan Lender?
This will probably be the trickiest part of finding a private student loan issuer – finding the best lender for your personal needs. This will take some effort on your end, as you will need to use multiple comparison sites to make sure you are getting trustworthy information.
Search for private student loan comparisons and choose which one fits the ideal interest rate ranges, loan terms, fee structure, and customer reviews you are looking for. Double-check to make sure that the information you’re getting online matches up with what the lender’s website says.
11) Do I Need a Cosigner to Get a Private Student Loan?
For the most part, yes. The vast majority of private student loan issuers – unlike with federal loans – will require borrowers to have a strong credit history. If you are under 21, then you will almost certainly need a cosigner.
It would be extremely difficult to get approved for a private student loan without a cosigner if you don’t have much credit history, so if you can’t find a cosigner you will have to build up your credit score with other types of loans first (like loans on college furniture, or even federal student loans – both of which can boost your credit).
12) How Long Will It Take to Get My Private Student Loan Money?
After you are approved for and accept the terms of a private student loan, your work is pretty much done – at that point, your lender and college will work the rest out. Your lender will certify with your school your enrollment status and the cost of attendance, then finalize the disbursement.
Your individual lender will disburse the money to your school directly, and each school will differ – your individual college’s financial aid office will provide you with these necessary details as you finalize the private student loan application process.
13) Can I Refinance My Private Student Loans?
Yes, you can. There are a multitude of companies that offer refinancing of both private and federal student loans. You are able to combine federal and private student loans together by using a refinance loan. If your credit score has improved, you are may increase your likelihood of being eligible for a lower rate. Refinance loans are underwritten traditionally by private banks and lenders; your credit score and income play a big factor in your eligibility for a beneficial refinance loan.
14) Can I Consolidate My Private Student Loans With Federal Student Loans?
Yes and no. You can consolidate any combination of private and federal student loans using a private refinance loan. Or you can consolidate multiple federal student loans through what’s called a federal Direct Consolidation Loan. But you may not roll private student loans into a Direct Consolidation Loan.
You can help yourself by simplifying your payments, possibly extending the length of your repayment plan, and – if your credit score has improved – maybe even get a better APR by consolidating multiple student loans together.
Author: Jeff Gitlen
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