Student Loan Underwriting Process

With the cost of tuition increasing each year in the United States, the majority of college students end up using student loans to help pay the costs.

You can look for scholarships and save up as much as possible, but you might still have a funding gap. This is where applying for student loans come in.

With federal student loans, you’re pretty much guaranteed to get a loan if you are attending an eligible school.

With private student loans, though, there is an underwriting process. This can be similar to mortgage underwriting or underwriting for an auto or personal loan, but there are differences as well.

On this page:

• What is Loan Underwriting?
• Private Student Loan Application & Underwriting Process
• How Is the Process Different for Federal Loans?
• Student Loan Underwriting vs. Other Loan Underwriting

What is Loan Underwriting?

When lenders try to decide if you are a good risk before making a final decision, they take you through an underwriting process. This process is designed to determine the likelihood that you will be able to repay your loan.

Your credit report is pulled, along with your credit score, bank statements, income, and tax returns. This documentation is often considered to figure out if you’ll be able to handle monthly payments in the future. With the private student loan underwriting process, your school choice and major might also be considered, unlike a mortgage application. 

Realize, though, that with federal student loans, there isn’t the same underwriting process. Subsidized and Unsubsidized Direct Loans are available to undergraduate and graduate students, regardless of credit situation. Federal PLUS loans for parents and grad students, though, do require a limited credit check.

Private Student Loan Application & Underwriting Process

When getting private student loans, you’ll be subject to the underwriting process, much like you would be if you wanted to borrow using other types of debt. Here’s the step-by-step process of the loan application and underwriting process for a private student loan.

Information You Need to Submit

As you apply for a private student loan, you need to gather certain documentation and have identifying information available for the underwriting process. Before you complete an application for a student loan, make sure you have the following information available:

• Name
• Birthdate
• Social Security number
• Driver’s license or other state-issued ID number
• Current home address
• Phone number
• Email address
• Income
• Debt payments

You might also be asked to upload additional documentation, such as copies of documents that substantiate your claims. For example, tax returns and pay stubs, along with bank statements, can help loan underwriters verify your income. Your bank statements might also help underwriters see how much you owe and what you pay each month on your obligations or spot any potential red flags, which relates to your debt-to-income ratio. 

When applying for private student loans, you also need to share which schools you’re applying to, how much you plan to borrow, and when you expect to graduate. Some applications ask for your planned major as well.

Finally, most lenders also allow you to add a cosigner to your loan application. This person shares the responsibility for repayment and his or her credit will be considered in the underwriting process.

The Approval Decision

Private banks and lenders take the information you provide in your loan file and decide if they want to provide you with funding. They pull your credit report and look at your credit score to see if you have a good track record with making payments on your debt. They will also look at your cosigner’s credit report, if you have one. 

Lenders may also consider your potential earning power, along with your current income, to determine if there’s a good chance you can afford your loan payments during school and when you finish.

If the private student loan provider thinks you’re likely to be able to afford payments, you’ll be approved for your loan. On the other hand, if the lender is uncomfortable with your current credit situation or if they aren’t sure about your income, you might be told no.

Accepting Loan Terms

Once you’ve been approved, it’s time to accept loan terms. Your lender will typically give you a few offers with different repayment terms and interest rates. They should also tell you what your monthly payment will be. Consider the offer and decide if it makes sense to accept.

When you accept, you might have to complete a module or course designed to help you understand the debt you’re taking on, as well as the consequences for missing payments or entering a student loan forbearance program. Pay attention if there is this type of counseling offered because it will help you better prepare for the future.

School Certification

After you accept the loan terms, the lender then verifies the amount of the loan with the school. Your school certifies the loan amount, and it might be for less than you’re approved for. Only after the school certifies the loan will the funds be disbursed.

You can cancel your loan any time before the funds are sent to your school, so keep that in mind as you continue to look for ways to pay your costs.

Disbursement

Rather than giving you the money to pay for school, lenders send the funds straight to the school. This is called student loan disbursement. The school receives the money and applies it toward your costs for tuition, fees, and other expenses you pay to the school. Any remaining amount is in turn disbursed to you with the understanding that you’ll use it to pay for expenses like books, a room, and transportation related to getting your education.

Repayment

When you start repaying the loan depends on your terms. With private loans, you might be required to start repaying the debt while you’re in school. Some lenders, though, let you defer your first payment until after you graduate.

In any case, at some point, you’ll have to start making payments. Be sure to make your payments on time to keep your credit from being negatively impacted.

Interest Rates

The interest rate you receive on your private student loan can make a big difference in your repayment. If you don’t have a high credit score, you might pay a higher rate—leading to repaying more total over the life of your loan.

If you have a good credit report and score, or if you have a cosigner with a good credit history, you can get a lower interest rate and save money on the cost of your loan.

The Role of a Cosigner

Your cosigner is someone who agrees to take responsibility for your debt if you don’t make payments. Often, a cosigner is needed with private student loans because many students, especially undergraduates, haven’t had the chance to build a credit history. Without a credit report to detail their ability to repay, students often can’t qualify for private loans without a cosigner.

Because your cosigner is agreeing to take responsibility for paying the loans, their credit score and other information will be considered during the underwriting process. If they have good credit and a good income, you can get a good interest rate on your loan.

How Is the Process Different for Federal Loans?

With federal loans, you don’t have to worry about the underwriting process for Direct loans. You apply for your federal loan using the Free Application for Federal Student Aid (FAFSA), and the government only looks at how much you need and what the cap, set by law, is. With federal loans, interest rates are set by Congress and fixed for the term of your loan. Your credit score is irrelevant when it comes to how much you can borrow.

The only exceptions are federal PLUS loans. These loans can be taken by parents and graduate students to help cover costs. They have fixed interest rates as well, but there is an underwriting process of sorts. Basic information about negative credit events is considered for approval, although having a good credit score won’t result in a lower interest rate.

Student Loan Underwriting vs. Other Loan Underwriting

While the underwriting process is reasonably thorough with student loans, it’s not as robust as, say, mortgage underwriting. With mortgage lenders, your collateral (the house you buy) is considered, and your loan amount might be limited by the value of the asset. There are also other differences.

For example, homebuyers usually have a down payment to put toward the cost of the home when they’re working with a mortgage underwriter and loan officer to get a mortgage loan. Student loans are unsecured, so there is no tangible asset to check.

When someone is getting a mortgage loan approval, their interest rate is determined in many of the same ways as private student loans. Their mortgage payments can be lower however, if they make a bigger down payment. Some home loan borrowers may opt to have their closing costs including in the loan itself. 

No matter what happens, the student loan underwriting process is an important part of the equation. However, it can make sense to fill out your FAFSA and get federal loans first, since they don’t require underwriting. Only consider turning to private student loans if you’ve exhausted your other options and you still have a funding gap.

>> Read More: How do student loans work?