Private Student Loans

Private student loans come into the student financing picture when public programs like the Department of Education and its Stafford Loan program cannot provide enough lending to students. Both parents, students, and others can borrow on behalf of the student with private student loans to make college more affordable.

Private Student Loan Lenders
There are literally thousands of private student loan lenders who can provide the financing necessary to pay for a college education. In general, it is advised that borrowers seek out a private student loan only after tapping the full potential of public programs.

In order to fully maximize public loans before private loans, first start by filling out the FAFSA, or Free Application for Federal Student Aid. The FAFSA is required for both private and public loans, and its calculations will aid private lenders in determining the amount of money a student needs to successfully enroll in college.

Private student loans are very different from public student loans in that the terms, interest rates, and repayment terms vary. Whereas a public loan like the Stafford Loan to students is based on a 10 year repayment term, a fixed interest rate of 6.2% per year, and is not based on an applicant’s credit history, private loans are the opposite.

Private Loan Features
Private student loans typically include all the following elements, which differ from a public loan:

Variable interest rates – Most private student loans are made on the basis of a variable interest rate, which means your monthly payment will rise or fall with the rate of interest. Keep in mind, though, that variable rates are significantly lower than fixed rates, all else being equal. With fixed loans from the Stafford loan program coming in at an interest rate of 6.2%, most private loans come with interest rates of 3-4%, a significant savings over the life of the loan.

Credit approval – A borrower must be approved for a private student loan, which usually involves a credit check. Those with limited credit history or bad credit should not worry, however, as the private lending market for student loans is awash with cash necessary to make loans to students. In general, students can receive a private student loan with a very low interest rate by asking a friend, family member, or grandparent to consign the loan on their behalf. A cosigner will reduce the interest rate paid on the private student loans you take out, and increase chances for approval.

Lending terms – A private student loan typically has a repayment term of 10 years or less, but the maturity date can vary. After you graduate, you may opt to extend the loan to 20 or 30 years to lock in a low interest rate for the longest period of time possible. This flexibility is ingrained in public student loans, but remember that the interest rate on private loans is almost always significantly lower than public loans.

Monthly payments – Private student loans usually come with immediate monthly payments of $25 or less. The monthly payments are to ensure that borrowers are responsible with debt, and also able to pay back a loan on time. Public loans do not need be paid until 6 months after graduation, however, paying back a loan early is a good thing—it will reduce the power of compound interest while you’re working your way through college.

Applying for a Private Loan
Applying for a private student loan is easy, and many banks and national lenders like Sallie Mae put the application online. Before applying, determine exactly how much money you will need to borrow. Include your living costs, tuition fees, and other expenditures and subtract the total amount of other aid from the government or public lending services.

Applicants for private student loans who ask only for a loan equal or less than their financial need will have the best chance of success in receiving a student loan with low interest rates, flexible borrowing terms, and approval. Those who ask for the largest loans are more likely to be denied, stuck with higher interest rates, or require a cosigner.

Also, since both public and private lenders charge an origination fee on top of each loan processed, you’ll want to be sure that you do not borrow too much money and thus pay fees on loans you will not need.