School is expensive. Really expensive. So what happens if your dream school costs more to attend than your federal student loans cover? Does that mean you need to give up your dream to be the greatest brain surgeon in the history of brain surgery (or whatever it is that you’re studying to do)?
You can still cure the sick someday; you’ll just have to take out some private or alternative student loans in the meantime. Private student loans are often a necessary way to supplement federal student loans. They’re the ones given out by private banks or other lenders.
When I attended college, I did not have much savings or support from my parents. Though I did receive some scholarships, grants, and federal student loans - I did have to use private student loans to bridge the gap.
Even though private student loans aren't the ideal way to pay for college (largely because they typically have higher interest rates), often they are necessary.
In this post, I will go over what private student loans are, how they differ from federal student loans, who the top lenders are, and much more. If you have any questions or need help, feel free to contact me and I'll do my best to help you out!
What are Private Student Loans?
Private student loans are credit-based loans offered by private financial institutions instead of the federal government. Just like federal loans, they are used to pay for educational expenses while in school, including room and board and textbooks. But there are many important distinctions between the two.
Generally, most borrowers are better off maxing out their available federal loans before applying for private loans. In fact, about 90% of new student loans are from the federal government, according to our statistics. While at first glance many private lenders offer more competitive rates than the federal government does, there are no private lenders out there that offer all of the extra benefits federal loans do.
Who Offers Private Student Loans?
Private student loans are offered by many banks and credit unions across the country, as well as credit card companies and online financial lending institutions. There are several websites online that will allow you to shop around for interest rates and other terms. These websites are online marketplaces where one application matches you with multiple private student loan offers.
When shopping around for a private student loan lender, explore as many avenues as you can. Talk to the place where you regularly bank, and even where relatives bank, to see what sort of loan products and interest rates they can offer you. But because the internet allows you to compare loan offers from dozens of lenders across the country, don’t commit to a loan at a traditional bank in your area until you’ve determined what sort of offers you qualify for from online and non-traditional lenders as well.
How Do Private Student Loans Differ from Federal Loans?
Speaking generally, many private student loans will offer better interest rates than their federal counterparts, but do not offer all the long-term benefits that federal loans do. When a borrower takes out a federal student loan they can apply after graduation for income-based repayment plans, hardship deferral, and loan forgiveness.
Private student loans very rarely offer any of these benefits. But, private student loans can fill gaps in financial need and meet unexpected expenses while in school. All private student loans will begin to accrue interest from the day they are borrowed. And private student loans depend upon credit the way any other private loan does – which means college students often need a cosigner in order to get them.
Private student loans are also shopped for, as opposed to federal loans. When applying for federal loans the student fills out a FAFSA (Free Application for Student Aid) and submits proof of their or their parents’ income. Then the federal government offers a set amount of loan funds at set interest rates. There’s absolutely no haggling the government for better interest rates! Compare that to the process of shopping for student loans, which involves a great deal of comparison shopping and evaluating competing products.
A savvy borrower needs to know ahead of time what aspects of a private loan is most important to them. Is it the interest rate? Flexibility in making payments? Smaller loan payments that gradually become larger as a career moves forward and income increases? Or perhaps the most pressing concern isn’t even that of the borrower.
Many, if not most, private student loan borrowers need to use cosigners to qualify for loans. Some, but not all, private lenders have built-in timelines that allow a cosigner to “fall off” the loan after a borrower makes a set number of monthly payments on time. If your cosigner is uncomfortable being on the loan long-term, whether a lender offers that option or not might make the difference between taking a loan or leaving it.
Facts About Private Student Loans
For private loans, in most cases your repayment begins immediately. That means with some private student loans the borrower will need to make payments while still in school, which in turn means that the borrower will need some sort of income with which to make those payments. However, there are loans out there that do offer deferment while in school and repayment only once the borrower has graduated or left school for some other reason.
Borrowers should read all of the fine print so they are aware of not just interest rate and loan length, but also what options are available to them – if any – should they become unemployed or unable to make their payments. Remember, private student loans cannot be cancelled or forgiven the way federal loans can. Some lenders will offer unemployment protection for an additional monthly or yearly fee. It’s also possible to purchase insurance separately that will make payments for you if you cannot.
How to Apply for a Private Student Loan
The application process for private student loans involves filling out an application either online or on paper. If you are applying with a bank or credit union, it’s likely that you’ll go to one of their branches in person to apply. However, you can shop around for many different loans using just one application by going to websites that specialize in helping students find and compare loans.
If you are using a cosigner, you’ll need your cosigner to fill out the applications with you. Expect a decision to be swift – a matter of minutes in most cases – unless the lender wants extra documentation, such as employment verification. If the lender has a lot of requirements then the process might take several days or even longer, depending upon how quickly you can gather the documents the lender requests, and how long the lender takes to review them. But many lenders evaluate just one factor – your credit score. Those lenders typically give approval or denial decisions the very same day as the application.
Private Student Loan Interest Rates
The interest rates offered on private student loans can vary wildly, from as little as 2.9% interest or lower, to as much as 18% and higher! The interest rates you’ll be offered will depend upon your credit score and credit history. If your credit score is poor or you have not established a credit history yet, be prepared to find a cosigner in order to have a chance at private student loans. The best cosigner is probably a parent, but that’s far from a requirement. Most lenders will allow your cosigner to be any adult with good credit who is willing to sign for you.
While federal loan interest rates are locked for the life of the loan at the time the money is borrowed, many private lenders offer variable interest rates as well as fixed rates. Be wary of variable rates, because they can cause your monthly payments to shoot up unexpectedly in response to market conditions. Variable interest rates are often based upon a market index, and might be recalculated either yearly or monthly. This means your payment can go up and down several times over the life of the loan.
Unfortunately, variable interest rates are more likely to raise when the economy is doing poorly – which often coincides with borrowers who are suffering economic hardship and can put them in an even worse financial condition. Carefully weigh the pros and cons of fixed versus variable interest rates, taking into consideration the amount of time you expect to take to repay the loan and what your monthly payment will look like if rates rise sharply.
Using a Cosigning
When applying for a private student loan, the lender is going to evaluate your creditworthiness, including your credit history and credit score, before making a determination on whether to lend to you. Because so many college students have little or no credit history, it’s extremely common for a borrower to use a cosigner with a stronger credit history and higher credit score. It is extremely difficult to get a private student loan without a cosigner. Sometimes a cosigner is necessary just to get the loan; other times, the cosigner simply allows the borrower to receive the loan at a more favorable interest rate.
Remember, the cosigner is actually agreeing to repay the loan if you fail to do so. This gives you a greater chance of approval for the loan, because the lender knows it has a second person to go after for payments if you don’t keep your end of the bargain. It also means that if you fall behind on your payments it could adversely affect your cosigner’s credit score, and they might even be forced to make your payments for you or risk garnishment of their income and continuing adverse marks on their credit report. Make sure that anyone willing to cosign for your private student loan understands the risk and commitment of being a cosigner, and isn’t feeling pressured into helping you. If someone expresses to you that they are uncomfortable cosigning, that’s a sign that you should find someone else.
Private Student Loan Repayment
Repayment of a private student loan might begin as soon as the very next month after the money is borrowed. If so, the student needs to have a plan in place for how they will make those monthly payments while still in school. If you work part-time, you might have the means to make in-school payments. Or, you might have parents or other relatives who are willing to help you out with the payments until you graduate.
Still, some private lenders offer loans that are deferred while the borrower is enrolled in school, and even for a few months after graduation. If you can choose a loan with deferment, I recommend doing so but trying to make regular, small payments toward your interest while in school. If you can make large payments then that’s even better! But keeping on top of the interest, which can compound and lead to a much larger loan balance, should be the bare minimum goal.
If you have graduated, have a job, and have a good credit score, you should consider refinancing your refinancing your private student loans. Often, you can get a much lower interest rate which will save you thousands over the life of your loan.
Who are the Best Private Student Loan Lenders?
With so many options out there, it’s easy enough to feel overwhelmed when researching lenders. Below, I have picked out three very different lenders that, in one or more ways, are an excellent choice for some borrowers.
One is a company relatively new to student loans, another is a company long-established, and the third is a brick-and-mortal traditional bank that has emerged onto the national private student loan market.
1) College Ave Student Loans
College Ave is a relative newcomer to the student loan game, but is getting a lot of notice for its flexible repayment options.
College Ave Student Loans is a company that offers both new private student loans and refinancing of existing student loans. In addition to its simple application process, this company offers some flexible repayment plans – an option that can be rather comforting to borrowers who are keenly aware that they give up federal repayment plan options in order to refinance privately to lower rates.
Rates and Terms
College Ave offers both fixed rates and variable rates. Their fixed rates run from 4.74% to 8.5%, and their variable rates start at 2.5% and go up to 7.25%. They also allow a borrower to choose a loan repayment length from five to fifteen years, and offer interest-only introductory periods of up to two years.
College Ave is going to be an attractive option to borrowers who favor flexibility over long-term savings. In particular, their two-year interest-only payment period will actually cost borrowers more money over time, but the flexibility of smaller payments could free up other funds that can be applied toward paying off higher interest loans such as car loans or other private student loans. And the ability to choose a shorter or longer repayment period allows the borrower more of a choice in loan terms.
Their relatively low interest rates means that College Ave is likely to be more picky about credit score than some other lenders will. But their starting fixed rate of 4.74% is not low enough to be competitive with the most credit-worthy borrowers out there. According to the company, their minimum qualifications are a credit score in the high 600s and an annual income equal to about twice an applicant’s debt.
It’s easy to apply with College Ave because their application is processed through their website. Also, you won’t need to get a payoff from your current lender in order to apply for a refinance through College Ave. They claim that they will pull that payoff amount from your credit report for the application. (Be prepared to still obtain a current payoff if you decide to move forward with refinance after the initial application.)
There’s a lot of great things about College Ave, but if you’ve got a top-notch credit score or a cosigner with stellar credit, you might want to look elsewhere to find the very best interest rates.
2) Sallie Mae
Sallie Mae is a trusted name in student loan lending which has been around for many years.
Sallie Mae was actually part of the federal government when it was formed in the 1970s, but went private in 2004. These days, it focuses on originating private loans.
Rates and Terms
Like most lenders, Sallie Mae offers interest rates that are either fixed or variable. Their fixed rates run from 5.74% to 12.87%. Their variable interest rates start at an extremely low 2.50% up to 11.89%. Sallie Mae also offers loan terms up to fifteen years, and grace periods after graduation of up to six months.
Sallie Mae is one of the rare private student loan lenders who offer some deferment and forbearance options. Perhaps it’s somewhat of a holdover from Sallie Mae’s federal past, but whatever the reason, this leads to being a good choice for borrowers who are nervous about the general lack of these options in private loans. Another nifty benefit that Sallie Mae offers is cosigner release. As long as your payments are made on time and you aren’t suffering from adverse credit circumstances, chances are good that you can get a cosigner released after 12 months of making your payments. If you have a hesitant cosigner while shopping for loans, this might be a good choice because it allows them to come off the loan relatively quickly. Certain other lenders do not allow cosigner release at all, while others require the borrower to successfully make payments for a much longer period of time.
Sallie Mae requires a minimum credit score of 640, but a score won’t guaranty that you’ll be approved for an application, it’s just a minimum requirement. If your own score is not that high, you might look into using a cosigner. According to the company, around 40% of applicants get approved, but the vast majority of them have cosigners.
You can apply directly with Sallie Mae online. If you’re using a cosigner, your cosigner will need to add their information to your application. Sallie Mae might require additional documentation to be emailed, faxed, or mailed in.
Salle Mae has a lot of experience in the field of student loans, which is why it’s surprising that their parent loans generally have higher interest rates than student loans.
3) Citizens Bank
Citizens Bank is a lender that operates out of Providence, Rhode Island. It is a traditional bank that entered the private student loan market on a national level and has been very successful.
Citizens Bank for the most part offers a traditional student loan product, but at competitive interest rates. Borrowers can both refinance their existing loans through the bank and also take out new student loans while in school. Of the three lenders, Citizens Bank offers the longest repayment period, which can extend up to 20 years at the borrower’s choice, or as little as five.
Rates and Terms
Citizens Bank offers fixed rates between 3.74% and 7.99%, and variable rates between 2.10% and 7.89%. But borrowers can receive a pretty hefty discount – 0.5% - if they open a Citizens Bank account and make their loan payments through automatic debit from that account.
An amazing feature of refinancing through Citizens Bank is that it allows borrowers to apply for refinancing before they graduate. Many other lenders don’t do this. Refinancing higher interest loans while still in school is a smart move, because it reduces the amount of interest that is accruing and compounding before graduation.
Borrowers who seek to refinance must owe at least $10,000 and have a minimum credit score of 660. Citizens Bank also requires annual income of at least $24,000, although borrowers with higher loan balances could need higher incomes in order to qualify.
Don’t worry, you won’t have to take a road trip to Providence, Rhode Island in order to apply with Citizens Bank. Like the other lenders on my list, all you need to do is visit their website and apply online. Citizens Bank also participates in some online marketplaces that match you with the best loan products for your credit score and situation.
Citizens Bank is a traditional financial institution competing in a loan marketplace that has a lot of interesting competition. It’s repayment plans are definitely worth taking a look at, and they really shine in the area of refinancing, but they don’t offer the lowest interest rates around.
How to Choose a Private Student Loan Lender
Choosing a private student loan lender is all about comparison shopping for the loan product that fits your needs the best. When looking at different lenders, keep in mind that satisfaction with your loan is going to go way beyond just the lowest interest rate. Consider flexibility as well as cost, and consider how long the lender has been issuing student loans and what kind of reviews they get from other borrowers.
One of the biggest differences between federal loans and private loans is the lack of flexible repayment options when choosing a private loan. However, there are many private lenders out there that are starting to respond to borrowers’ desires to have private loans mimic federal loans by offering deferment options and flexible repayments. While private student loans are unlikely to ever offer the same level of benefits that the federal government can provide, if you spend enough time researching your options you are likely to find several lenders who offer the products and options you want at an interest rate you’re happy with.
Lastly, remember that you’ll be working with this company for a long time as you repay your loan. Just as you’d research customer service when deciding upon a cell phone provider or car dealership, check to see what sort of reputation each lender has for giving qualify customer service. If you find that a lender consistently gets low reviews for their attentiveness to their customers, stay away – even with a low interest rate, it isn’t worth it.
Benefits of Private or Alternative Student Loans
· Fewer Limits: Private student loans don’t generally have maximum loan limits in the same way that federal student loans do. They won’t lend you millions of dollars but they will give you more than enough if you require it. That’s why many people turn to private loans for unmet needs. Drinking money is not an unmet need, fyi!
· Lower Interest Rates: Many private student loans have lower interest rates than federal student loans.
· Some of the Same Benefits: Many offer to defer your payments for six months after you graduate and offer deferments for other reasons like if you go back to school or find yourself unemployed. Like unsubsidized federal loans, interest will continue to accrue on these loans while they are in deferment. There are a lot of things that most private loans don’t offer, however, like loan forgiveness or income-based repayment programs. If you need to get private loans, be sure to check what your loan provider offers.
· Convenience: Private loans will let you set up automatic payment of your loans from your bank account. This can be incredibly convenient and it can save you money. Many loan providers will give you a discount on your interest rate for setting this up.
Drawbacks of Private Student Loans
· They are Based on Your Credit: Private student loans run credit checks on borrowers. One of the biggest problems for students is that they don’t have a credit history and so might have a problem getting a loan. If they are able to get a loan with little to no credit, it might mean that you’ll have higher interest rates.
· You Might Need a Co-signer: Having someone co-sign for your loans is sometimes the only option to obtain private loans, but tread carefully. The problem is that if you run into financial trouble and have a hard time paying your bills the loan provider will go after whoever co-signed for payment, and if they are unable to pay that will affect their credit rating as well. Try to avoid loans that require co-signers if possible, and if you must use a co-signer make sure they understand what they are agreeing to in terms of commitment to the loan. If it cannot be avoided, look for loans that remove the co-signer once the principal borrower establishes a credit history or makes a certain number of payments on time. These can be hard to find but they do exist! cuStudentLoans is one provider of such loans.
· Not all of the Same Benefits: As I mentioned above, private student loans have fewer benefits and less flexibility. While these bells and whistles might not seem important now, if you are ever in tough financial spot, you will appreciate the flexibility.
· Some Have Variable Rates: Variable rates mean that the amount you’re charged in interest varies over the course of your loan. Choosing a variable rate loan might be a good idea if interest rates are very high – they will undoubtedly fall over the course of the loan. However, we’re currently in a time of historically low interest rates which means that rates can only go up. Variable rates are determined by one of two methods – by the LIBOR rate which is the rate banks charge each other or the prime rate which is the rate that people with the best credit can borrow. Regardless of which method a variable rate loan offers, they’re often not good for you. Look for a fixed rate private loan with a lower rate if you can, and consider a variable rate only if you must.
How to Decide if a Private Student Loan is Right for You
Hopefully this article has helped you gain a greater understanding of how private student loans work and the options that are available to you. It’s easy to fall into the trap of borrowing an ever-increasing quantity of loans while in school. But once you graduate and all of your loans – both federal and private, if you have any – become active, you may regret bad financial decisions made in college.
The best advice I can give you to help you decide if a private student loan is right for you is to set aside a block of time to plan out what your budget looks like while in school and think of any way possible to avoid borrowing extra money. This might mean looking for ways to make extra spending money on the weekends instead of increasing your loans to pay for recreational activities. Or, it might mean cutting back on unnecessary expenses or finding ways to eat cheaper and healthier by preparing more meals yourself. If you do the math and conclude that you really do need to borrow private student loans while in school, research your options carefully with an eye toward long-term options over the life of your loan.