Private Student Loans

Private student loans are education loans that are provided by independent private banks and lending institutions, and are not affiliated in any way with the Department of Education.

They can provide money to students who need to bridge the gap between what they may receive via federal aid and other types of awards and what it costs to attend college.

The main advantage of a private student loan is that it can in-fact provide the money that is needed once federal aid, scholarships, and out-of-pocket funds have been exhausted, as most private college loans can be disbursed up to the cost of attendance.

Critical Aspects of Private Student Loans

Here are some quick items that you must take into account when applying for a private student loan:

• Interest rate and fees
• Loan amount limit
• Term of the loan
• Presence of repayment benefits
• School certification
• Reputation of lender

Interest Rate and Fees

The interest rate for a private student loan can be fixed, but it is usually adjustable, and made via a margin that is added to a standardized index, such as the T-bill, or LIBOR. Borrowers who are more qualified become eligible for the lowest margins, while the least qualified borrowers typically receive the maximum margin that is available

Private student loans will also come with a wide variety of fees most of the time, with some of the more common fees including:

• Application Fees
• Origination Fees
• Repayment Fees

Some lenders will offer a loan product that will come with no fees whatsoever, although they will usually compensate for this on the back end by boosting the interest rate by a quarter, to a half point or so.

Loan Amount Limits

The vast majority of private student loans will be able to provide up to the cost of attendance of going to your particular postsecondary institution, although there are still limits lenders will put in place when they think they are taking on too much risk.

It is also important to note that only the most qualified borrowers will become eligible for such loan limits, as lenders again will only take on so much risk. Regardless, you don’t have to be the perfect applicant in order to get a considerable amount of private student loan funding, and rather you simply need to meet the lender’s standard guidelines to get what you need most of the time.

Remember the best way to utilize the amount of aid you can receive via a private student loan is to first take into account what you can receive via federal aid, combined with whatever scholarship and out of pocket money you may be getting for a particular academic term.

By subtracting this aid from your cost of attendance you should then produce a remaining figure that you will have to pay for somehow in order to attend school. This is where private student loan funding should be considered.

Term of the Loan

The terms for most private student loans typically fluctuate between 15 and 25 years, although they can range anywhere between 5, and 40 years.

Most student and parent borrowers simply assume that getting a longer termed loan is preferable to a shorter term loan, but this is not always the case, as you may end up paying more in finance charges with a longer termed private student loan.

Presence of Repayment Benefits

Repayment benefits are things like deferment, forbearance, and payment-adjustment options that can make paying back a private student loan easier once you leave school.

Whether a private student loan comes with any of the following repayment benefits is reliant exclusively on the particular loan product at hand:

• Deferment while in school
• Grace period deferment
• Voluntary deferment
• Forbearance
• Payment-adjustment options
• Interest-rate reductions
• Cosigner release clause

Deferments

Most private student loans will at least come with an in-school deferment that won’t require you to make payments while you’re attending class, but even this isn’t guaranteed.

Grace period deferments are fairly common for six-months after graduation, while voluntary deferments are less prevalent with most private education loans.

Forbearance

Forbearances are common with private student loans, although less preferable when compared to a deferment due to the fact that the accrued interest will be capitalized with the principle of the loan, thus costing you significantly more money over time.

Payment Adjustment Options

Payment adjustment options such as interest-only payments, and income-sensitive payments are also common with private student loans, and can help you immensely when it comes time to payback your loan.

The key is to figure out what options your lender may have available before you actually take out the loan.

Interest-rate Reductions

Interest-rate reductions are also commonplace with private student loan funding, and are usually put into place after you have signed up for what is called “auto-debit”, or “auto-pay”, as this is when the lender takes the money out of your bank account automatically each month.

Interest rate reductions are also regularly given when you make a consecutive number of on-time payments.

Cosigner Release Clause

Private student loans can come with a cosigner release clause that can allow your cosigner to be off the hook for good on your loan if you meet the necessary requirements that can allow such an initiative to become effective.

The requirements that will have to be met in order to have the cosigner of your loan officially released will vary with regard to the actual student loan you receive.

School Certified Private Student Loans

Most private student loans are now school certified, meaning that the college must verify the loan before it can be approved and disbursed to the student borrower.

Uncertified private student loans are much less commonplace in today’s market, but do exist to a small extent. I recommend to students and parents that they try and stay away from private student loan lenders that don’t require school certification due to the fact that these lenders are often much less reputable, and offer a lower quality loan product when all is said and done.

Most private student loan lenders will make it quite apparent when you visit their website about whether or not their particular loan product is school-certified or not, so as a potential borrower it is something you should be looking for right off the bat.

Reputation of Lender

The reputation of the lender is one of the last things you should checkup on when searching for a private student loan, as many smaller lending institutions may claim that they are offering a legitimate private student loan, when in reality they are offering a personal loan, or even a payday loan, that may carry extremely high interest rates and fees.

The good news is that the best private student loan lenders are usually major banks that have a long-history making such loans, so in the end you can feel confident that you are getting something that is fair and reliable.

I have provided an extensive list of the 14 private student loan lenders that I think can provide a quality education loan product here in this article about private student loan lenders.

Getting Approved for a Private Student Loan

Getting approved for a private student loan is unlike becoming eligible for a federal student loan, which is based almost exclusively on your level of financial need.

Rather, getting approved for a private student loan is based on your credit history and score, and to some degree your employment history, and income. This is because private student loans are consumer loans that are based on credit, and not financial need, or merit.

The following items are taken into consideration when you apply for a private student loan:

• Credit score
• Credit history
• Presence of a past bankruptcy
• Current and past level of income
• Employment history
• Current level of debt
• Cost of attendance
• Current level of expenditures/ expenses
• Presence of a cosigner

The bottom line I tell student borrowers is that unless they have a good credit score, substantial credit history, and a regular income that could amount to what most lenders would consider to be a “full-time” income, they will not get approved for a private student loan with no cosigner.

Most students don’t have a built-up credit history, or what is considered to be a regular “full-time” income so they are left with the task of finding a cosigner in order to get an approval. It is important to note that not just any cosigner will due, as the cosigner that is supplied to the lender must meet their guidelines in terms of credit and income in order for the student borrower to get an approval.

Is it possible to get a private student loan without a cosigner? Yes, but the student borrower must have something to take the place of their poor credit and low income, such as a large piece of collateral. There is a chance a student borrower may be able to negotiate with a lender to the point where something could be worked out, but I don’t recommend this as 99% of the time this type of strategy simply won’t work.

In the end if you are a student borrower with the typical credit and income credentials of a college student you are going to have to locate a credit-worthy cosigner that is willing to cosign for you loan in order to get an approval—bottom line.

Private Student Loan Disbursements and Final Thoughts

Once approved for your private student loan the actual proceeds will typically be sent to your school’s financial aid department at the beginning of each semester, and allocated appropriately to your account balance, or other educational expenses that have yet to be paid.

Upon approval it is important that either your lender, or yourself let your school know that you will be receiving such private student loan funding for the upcoming year, so that they can plan out your financial aid package accordingly. This should happen upon immediate approval of the loan, as most of the time the actual proceeds aren’t sent to the school until some point at the beginning of the semester.

Final Thoughts on Private Student Loan Funding

Overall I have mixed feelings about private student loan funding. On the one hand they allow millions of students to get the money they need to attend college when no other avenue of financing is available. On the other hand, they put students in very high amounts of debt that is practically impossible to discharge via bankruptcy.

In the end I recommend to students to utilize private student loan funding as a last resort when all other forms of financial aid have been exhausted, and even then to use extreme caution when taking out such loans.

Sometimes it is just better to avoid going into such debt to afford a ritzy private school, and instead opt for the cheaper state institution that can help you achieve ultimately the same goal of getting a higher education. The bottom line is that student and parent borrowers should be careful when applying for this kind of debt, and while useful at times, private education loans can often come with a lot of baggage.