What are Private Student Loans?

By Kaitlin Hurtado on November 23, 2018

It is no secret that the price of a college education is high – an amount of money that is overwhelming for many looking to pursue a higher education.  Luckily, there are plenty of options available to help you pay for your college education: personal savings, grants and scholarships, federal loans, and private student loans. Ideally, you will want to have grants and scholarships to help you get through college. With grants and scholarships, you will not have to worry about paying back the money given to your from different groups or institutions – it’s the closest thing to “free” money you can get when it comes to helping you pay for college.

However, grants and scholarships aren’t always enough to cover the total cost of student loans and it will be up to you and/or your parents to cover the leftover costs. The next option that many students take to is student loans, either private student loans or federal student loans. If you are exploring your financial aid options and considering private student loans as an option, here are a few things you should know about private student loans:

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What are private student loans, and how are they different from federal student loans? 

By completing the Free Application for Federal Student Aid (FAFSA) form, you are providing information that determines your eligibility for financial aid. Once your eligibility is determined, your college can offer you one form of financial aid, or many: grants, federal student loan, and work-study. While the idea of financial aid may make you excited, it is important to remember that you will have to pay back the student loans you receive, including the interest you may have built up.

So how are private student loans and federal student loans different? Once FAFSA determines your financial aid eligibility, the government is the one funded the loan you are borrowing. However, for private student loans, you will have to apply for them through a bank, credit union, or online lender.

Federal student loans are typically more flexible than private student loans when it comes to repayment options. There are often alternative repayment options and borrowers protections. Because you would be borrowing directly from the government, you would have flat interest rates set by Congress on your student loans. With private student loans, however, your interest rates on your private student(s) will be determined on your or your cosigner’s credit. The lower your credit score is, the higher your interest rate will likely be.

What should factor into your decision on a private student loan?

Picking a private student loan is a big decision, and just like every important decision, you will want to spend some time comparing your options. Compare offers from different lenders – banks, credit unions, and online lenders – and find the lowest interest rate for you. Depending on the lender you are considering, you might be able to choose between a fixed interest rate and a variable interest rate. With a fixed rate, interest will stay the same throughout the life of a loan, similar to a federal student loan. A variable rate may be your lowest interest rate at a glance, but it has the potential to increase or decrease over time depending on the economy.

Another thing you may want to factor into your final decision is the possible borrower protections the lender will be offering: repayments options, deferment and forbearance. You may also have the option to choose your own loan term, where you can pay off a private student loan faster with less interest and higher payments, or pay less each time but get more interest as it will take longer to pay back the private student loan.

So you are set on private student loans, now how do you apply? 

Depending on the lender you are considering going with, there will be different application requirements. Typical documentation includes documents proving citizenship, identity, and income. You will also need to provide proof of school attendance and cost information, along with a financial aid award letter from your university.

A cosigner is not necessarily needed to apply for a private student loan, but for many undergraduate students, a high credit score is most often not a possibility. With no income or no/bad credit, you will need a cosigner to take out a private student loan. The cosigner will need to have a steady income as well as a good credit score – their role cosigner is to ensure that someone with an income/funds will have the ability to pay back the private student loan in the case that you cannot.

Your credit score, or your cosigner’s credit score, will need to be shown – often having to be at least in the high 600s or more to be qualifying. This is so that you establish credibility in order to show your lender that you can pay back the student loan bill with a debt-to-income ratio.

College is not an easy, nor inexpensive, endeavor. Luckily, there are options to help you pay for your college education and private student loans may just be the right option for you.

By Kaitlin Hurtado

Uloop Writer
Hello! I'm Kaitlin, a fourth year Literary Journalism major at UC Irvine. I'm a writer on Uloop's national team and a campus editor for UCI.

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