Table Of Contents
- Private student loans are a type of financial aid used to fund costs associated with higher education
- Loan requirements vary from one institution to another, but you can expect credit score and income minimums for baseline eligibility
- Students can use co-signers to meet eligibility requirements for private student loans
- Private student loans can have variable or fixed interest rates
- You can use private student loans in addition to federal loans and other forms of financial aid
What Are Private Student Loans?
Student (or educational) loans fall into federal and private categories. Private student loans are offered by private lenders like credit unions and banks, unlike federal loans guaranteed by the federal government. Federal loans are available to eligible students who complete the FAFSA (Free Application for Federal Student Aid) application process.
If a student finds themselves ineligible for FAFSA aid or has exhausted federally-backed aid, they may consider using private student loans to fund their education.
Private student loans can finance any expenses of pursuing higher education like tuition, study materials, and living expenses.
Eligibility Requirements For Private Student Loans
Specific eligibility criteria will vary from one lender to the next, but here are some general requirements you may expect when applying for private student loans:
- An Eligible Co-signer: Since most private student loans are sought out by undergraduates without a significant credit history, you’ll likely need a co-signer who holds good credit and a stable income. Co-signers act as insurance in the event that you cannot pay your loan payments.
- Low Debt-to-income Ratio: There isn’t a specific number to shoot for, but by ensuring that your debt-to-income ratio is less than 36 to 40%, you can maximize your chances of approval.
- Income: Lenders want to see proof of stable income to trust that you’ll be able to make your loan payments on time. Those not currently working will need to supplement with a co-signer.
- Credit Score: Private student lenders have tight credit score requirements. In most cases, you’ll need to have a score of 660 or above, but you may be able to get a loan with a lower score in exchange for a higher interest rate.
Pros And Cons Of Private Student Loans
Private student loans come with their own sets of pros and cons. Some benefits of private student loans include:
- More Flexibility For Students: You can get private student loans on top of federal loans to cover any gaps in your student expenses.
- Higher Loan Limits: Private student loans tend to have higher loan limits than federal loans, which are capped annually and throughout your schooling.
- Interest Rate Flexibility: You can choose between fixed or variable interest rate loans from private lenders.
On the contrary, some potential drawbacks to private student loans include:
- Fewer Repayment Options: Since private student loans do not offer borrower protection as with federal loans, repayment options can be a bit more stringent.
- Potentially Higher Interest Rates: Interest rates for private student loans tend to be higher than federal loans and are determined on a case-by-case basis while federal loans stay the same for each student.
- Credit Requirements: Private student loans can be harder to qualify for if you don’t have income or a good credit score. Students who can’t access an eligible cosigner for these requirements will be unlikely to receive private student loans.
How To Apply For Private Student Loans
1. Compare Lenders
Start by comparing private student loans to find what makes the most sense for your student needs. You should compare interest rates, eligibility, repayment options, and fees. Some lenders will let you prequalify for loans without a credit check.
2. Apply To Lenders
Once you’ve narrowed your search, apply to desired lenders. For the application process, you’ll need financial information, tax forms, and proof of identification for you and your co-signer (if applicable).
3. Select An Offer
Most lenders take a couple of weeks to process your offer. Once your application has been approved, compare your lending options. Some lenders may offer perks for maintaining a certain GPA, but the most important draw should be selecting a payment option you can comfortably afford for the foreseeable future.
4. Pick A Repayment Option
Your lender may offer several loans with various repayment options. Some common repayment options include immediate payment, fixed payment, deferred payment, or interest-only payment. Deferred and interest-only payments let you delay starting a heftier repayment schedule while you’re still in school.
Alternatives To Private Student Loans
Private student loans certainly aren’t the right solution for every student. Here are some alternative opportunities that you may want to consider instead or on top of applying for private student loans:
Work-Study Or Part-Time Work
While easier said than done, maintaining part-time work while attending school is a great way to offset expenses and grow your resume. Some colleges and universities may offer work-study programs that help you cover student expenses in exchange for working on campus.
Scholarships do not need to be repaid, making them an amazing way to supplement the cost of your education. You can find scholarships through private and nonprofit organizations for a variety of factors including background, special skills, interests, or academic merit.
Grants are another form of financial aid that doesn’t need to be repaid after graduation. You can receive grants based on financial need, academic merit, or career goals.
Federal Student Loans
Federal student loans are a great opportunity to fund your education, oftentimes at a lower interest rate than private loans. You can fund your education using a mixture of federal and private student loans barring eligibility.
Frequently Asked Questions (FAQs)
Is It A Good Idea To Get A Private Student Loan?
A private student loan can be a great way to fund your college education, but it isn’t the only financial aid option. Determining the best financial aid solution will vary greatly depending on your career outlook, the cost of the degree, current financial standing, and other factors.
Who Is Eligible For A Private Student Loan?
Eligible student borrowers must have a good credit score and meet the income-earning requirements set by the lender. For this reason, most students need to have a co-signer who is responsible for taking on loan payments if the student doesn’t make them on time.
Are Private Student Loans Hard To Get?
Private student loans tend to have more stringent eligibility requirements than federal loans. Every lender is different, but private lenders look for good credit, low debt-to-income ratios, and proof of income from lendees and their co-signers.
Do Private Student Loans Hurt Your Credit?
Private student loans only hurt your credit if you miss payments, don’t pay your full payment balance, or acquire a high income-to-debt ratio. Loans are just one component of what goes into your credit score.
In short, it’s important to select a loan program that’s within your means to pay off according to your set payment plan. Utilizing private student loans may make it easier for you to fund your path to higher education. However, loans are just one piece of the pie when it comes to building a robust financial aid package.