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Private Student Loans

While many students end up taking out federal student loans to pay for their college expenses, a lot of students will need to apply for private student loans as well. Depending on the college you choose to attend and how many scholarships you win, federal student loans may not be able to cover all of your tuition and other college costs. Because each private lender can set their own rates and terms, it’s harder to shop around for the right private loan. Read below to learn how private student loans work, where to find them and how they differ from federal loans.

What types of private student loans are available?

You can take out a private loan for undergraduate or graduate school, as well as for vocational or trade school. Private student loans may have a fixed or variable interest rate.

Loans with fixed interest rates will have the same monthly payment throughout the loan term, while loans with variable rates will have monthly payments that may increase or decrease depending on outside market forces.

Interest rates will also depend on the repayment term. Longer terms have higher interest rates and lower monthly payments, while shorter terms have lower interest rates and higher monthly payments. If you're not sure what your income will be post-graduation, choosing a longer term can result in more affordable payments.

As a student, you can still qualify for a private student loan even if you don't have a credit history or a source of income. Most private loans require a co-signer, an adult who promises to take over payments if you default. There are a few lenders that do not require a co-signer, but will usually charge higher interest rates in exchange.

Interest rates on private loans will vary depending on your loan amount, repayment term and if you have a co-signer. They may also consider your credit score and income. Some private loans may even provide lower interest rates for borrowers with stellar GPAs or high-earning majors.

How much money can I borrow in private student loans?

In most cases, the maximum annual loan amount is the cost of attendance minus other financial aid, including grants, scholarships, work-study and federal loans. For example, if you receive a $2,000 scholarship, then $2,000 will be deducted from your total private loan amount.

Unlike federal loans, private loans usually don’t have an aggregate loan limit. Like most private sector lending programs (home loans, auto loans, etc.), each lender is basing the amount of money they are willing to loan each prospect on the likelihood of the loan being repaid. Unlike most other lending programs, this is most likely going to be based on your parents' income and they will be required to co-sign for the loan.

Why should I take out private student loans?

Some students, including DACA and international students, do not qualify for federal loans. In this case, private loans may be their only option to pursue higher education.

Federal student loans also have annual and aggregate limits for undergraduate students. If you’ve hit either of those limits, then taking out a private loan may be your best stopgap.

Some students will not qualify for a very large amount in federal student loans, based on their FAFSA and whether they have ever defaulted on another loan, among other things. Another thing to take into consideration is the total amount in tuition, room and board and other related costs you will need to pay. Those attending high-priced colleges will need more money and are more likely to need to apply for private student loans.

Remember, the more scholarships you find and apply for, the better chance you have of winning some free money for college, thus reducing the amount you will need to borrow.

What should I consider when taking out private student loans?

When taking out a private student loan, the most important thing is to compare rates and terms with multiple lenders. Your goal should be to find the lowest interest rate possible with your ideal repayment term.

Interest rates for private student loans are already high, so it’s wise to find the lowest rate possible and save more money. The difference in rates can result in a sizable disparity when it comes to the monthly payment and total interest paid.

For example, let’s say you need to borrow $50,000. If you choose a lender with 12% interest and a 10-year term, you’ll pay $717.35 a month and $86,082.57 in total over the life of the loan. But if you find a lender that offers 9% interest, you’ll only pay $633.38 a month and $76,005.46 in total.

Every student should maximize their federal student loans as well as searching for scholarships and other free money before turning to the pricier route of private loans. Federal loans will offer lower interest rates, better repayment options and more loan forgiveness programs than private loans.

Because there is no limit on private loans for undergraduates, students often end up borrowing more than they can comfortably afford to repay after graduation. And most private loans do not offer income-based repayment plans, which can make payments hard to manage.

How do I get a private student loan?

While federal loans require that you complete the Free Application for Federal Student Aid (FAFSA), private lenders will have their own separate application. If you want to shop around with multiple lenders, you will have to complete an application with each individual company.

To apply, you will usually need to provide the following:

If you have a co-signer, they will also have to provide their contact and personal information. After submitting the application, the lender will run a credit check on both you and your co-signer.

The co-signer needs to have their own source of income and a solid credit score. If your co-signer has a poor credit history, your loan application may be rejected. In that case, you may need to find another co-signer.