The net student loan debt in the US stands at $1.56 trillion, with nearly 45 million American adults having student loans.
Student loans help aspiring graduates complete their college education. While the majority of student loans are provided under federal funding programs, private lenders are growing their share of student loans steadily. The latest research data indicates that private student loans account for 7.71% of the net student loans issued in the US.
As a student, choosing the right private student loan could be a daunting task, considering the number of private lenders and somewhat confusing terminology.
Our team at DollarGeek has created this guide for anyone trying to find the best private student loan in the market. Let’s get started.
What is a private student loan?
Unlike federal funding programs, private student loans are offered by financial institutions, such as banks, credit unions, and even non-banking financial companies.
A private student loan is a financial aid that helps students pay for their college expenses, including tuition, living expenses, accommodation, or stationery.
Private student loans have comparatively strict lending requirements, making them somewhat difficult to qualify for without a cosigner.
When should you apply for a private student loan?
You should apply for a private student loan only when you’ve exhausted your federal student aid. The first step when seeking a student loan should be to fill out the FAFSA® form and identify your eligible funding amount.
You can fill the form here. Fill the FAFSA® form.
How much can you borrow with a private student loan?
Federal student aid has limitations when it comes to how much you can borrow.
Private lenders excel in this particular aspect of student loans. Private student loans do not have borrowing limitations. You can borrow up to the cost of attendance, including tuition, stationery, and lodging expenses.
Although some private student loans have a minimum borrowing limit, which may vary from one state to another.
What are the eligibility requirements for private student loans?
The eligibility requirements of a private student loan vary among different lenders, but there are some common factors you need to consider.
- Credit score: Most private student loan providers have strict credit score requirements. We found it to be around 660 or above for most private lenders. It is possible to get a private student loan with lower credit scores, but you’ll end up paying more in interest.
- Income: The income requirements for private student loans are different for lenders. However, if you’re an undergraduate, you may be better suited to apply with a co-signer.
- Debt-to-income ratio: A high debt-to-income ratio is one of the primary reasons that nearly half of the student loan refinancing applications are rejected. There is no magic number, but ideally, it should be below 40% or 36%, if you want to maximize your chances of approval.
A look into the repayment terms of private student loans
Most private student lenders offer multiple repayment options. There could be some variation among lenders, but the most common repayment terms are listed here.
- Interest-only payments: Under this option, you have to make interest payments while you’re in college. Generally, students choose partial payment options to lower their financial burden after college. You may be able to get a discount by setting up auto payments.
- Deferred payments: The deferred repayment plan allows you to start repaying your loan after you’ve completed your degree. In most cases, you’ll get a grace period of six months, or more in certain cases (legal, dental, or medical), before the payments begin.
- Immediate payments: Under the immediate payments option, your loan repayments start while you’re in college itself. As a student, understand that this option requires a consistent income, although it’ll help you save interest charges in the future.
- Fixed payments: Students can opt for a fixed repayment amount, usually $25 per month, while they are in college. Your overall payments are then reduced from your loan amount once regular repayments start.
How to choose the right private student loan
With several lenders advertising their private student loans as the best, it could get a bit tricky to choose the best loan.
Here are some important factors you should consider before choosing a private student loan.
- Interest rates: Compare interest rates from different lenders. Usually, you’ll find lenders offering both fixed and variable interest rates. Also, these rates will vary depending on your credit profile or credit profile of the co-signer. You should seek quotes from different lenders to identify lower interest rates.
- Processing fees or hidden charges: Look out for processing fees, such as origination charges, application processing fees, or hidden charges in private student loans. A growing number of technology-oriented lenders are eliminating processing charges and other fees. Choose a lender that doesn’t charge these fees.
- Repayment options: Choose a loan with flexible repayment options. We have discussed some of the popular repayment options. Make sure that your lender offers flexibility when it comes to repayments. Also, working with a lender that offers flexible loan terms is another critical factor for ranking private student loans.
- Applicable rate discounts: Find out about any rate discounts. Some lenders offer a 0.25% discount for automatic payments. Similarly, others provide additional discounts for their existing customers. Find out more about these offers and speak with the customer care executives to get the best rates.
- Additional loan features: In addition to these factors, pay attention to the quality of customer service. Find out if there are some special credit requirements or eligibility criteria.
At DollarGeek, we analyze private student loans using multiple factors. Here are some of the best private student loan providers on our list.
Pros and cons of private student loans
Pros of private student loans
- Private student loans cover any funding gaps in your college expenses. You can borrow sufficient funds to cover the total cost of attendance.
- Private student loans have flexible payment terms and repayment options.
- You can receive instant approvals for private student loans.
Cons of private student loans
- You may end up paying higher interest rates for private student loans.
- Students with a lower credit score may find it challenging to get an affordable private student loan.
- You are blocked out of the loan forgiveness programs run by the federal government.
- You do not have access to income-based payment plans.
Private student loans cover the existing gap in student financial aid. It allows college students to receive sufficient funding to finish their school. When choosing a private student loan, make sure to do your research before choosing a lender. View our updated list of the best private student loan lenders here.