Private student loans make up 7.80% of the total outstanding student loan in the USA. That is more than $130 billion.
Private student loans are some of the most useful financial tools that help students pay for their education, especially when traditional financial aid is not sufficient. A private student loan is a great alternative option if you don’t qualify for a federal student aid program. And because banks and lenders offer many options for repayment, private loans may also be more suitable for your own needs.
Also, there is a high chance of getting approved with private student loans because with certain lenders these loans are not even based on the credit history of the applicant. Therefore, a private student loan would be ideal if you don’t qualify for a federal student loan or if you don’t have any credit history.
In this article, we will be digging deep into private student loans! We will discuss how they work, their advantages and disadvantages, the application process, and other useful information so you don’t get confused when you apply for a private student loan. So let’s get started!
What are private student loans?
Unlike federal student loans, private loans don’t originate from the government. Private student loans are used when a student either doesn’t qualify for the federal student loan or when their amount of financial aid is not enough to pay for his/her education.
Private student loans are mostly offered by the major banks, savings & loans companies, credit unions, and some other lenders who provide personal or educational loans. A private student loan typically offers benefits that include low-interest rates, flexible repayment options, and lenient borrowing limits. However, the interest rates on private student loans are higher than federal student loan rates.
How does a private student loan work?
A private student loan is the same as any other student loan, but they are offered by private financial institutions. When you apply for a private student loan, you need to submit your credit history and income information. The bank or lender will assess your particular situation and determine if they offer you the amount of money that you require.
Once you get approved, the lender will send your school’s financial aid office the funds. They will credit the required amount of money directly to your account and you can use it for paying tuition, housing fees, or any other expense that is related to your education. If there are any funds remaining, your school will transfer those to your nominated bank account.
How to apply for a private student loan
Before you apply for a private loan, make sure you understand all the terms and conditions of the loan. Compare different lenders or banks that offer student loans before settling on one. Once you have identified the lender with whom you want to go, it’s time for applying for a private student loan! Here are some steps that you need to follow:
1. Check whether you qualify for a federal loan or not
It is advised to apply for a federal student loan before you go for any other type of student loan because these loans offer lower interest rates. Interest rates on private loans are higher than federal student loan interest rates. Therefore, it is better to opt for a federal loan if you qualify for one. In most cases international students in the U.S. do not qualify for federal student aid.
2. Get your credit history in order
If you do not have an established credit history, then it will be difficult for you to get approved by some of the major lenders or banks. Make sure your credit report is error-free and clean. You can check your credit history from the three major credit bureaus: TransUnion, Experian, and Equifax. Once you have a good credit history, apply for a private student loan. There are a small number of lenders that do not require credit history and you can find out about them here.
3. Find a cosigner
It can be hard for students to build their credit score, so the easiest way to get approved for a private student loan is by getting cosigned. If you have someone who loves and trusts you (family members), they can be your cosigner on your application form. This will make it easier for the lender to approve your application because another person has vouched for you! In addition, if your cosigner’s credit history is up to the mark, you can get better repayment terms. Your cosigner must be a U.S. citizen or permanent resident. Most international students will need a cosigner, but there are a number of lenders that do not require one.
4. Find a suitable lender or bank for your private student loan
The most important step in applying for a private student loan is to find the right lender or bank that can provide you with the amount of money that you require. Each lender has its own terms and conditions. You can find different lenders by searching online or visiting your local bank or credit union. Take time to review different loans, rates, and terms before choosing one. One of the easiest ways to find a loan as an international student is to use our loan comparison tool.
5. Fill the application form carefully
Once you have found a good bank or lender, it’s time to fill out their application form. You will need your social security number, credit history, annual income, and other details in order to apply for a private student loan.
Filling out this form should be done carefully because this information will be used to make a decision on your loan approval. If you have any doubts or do not understand something in your application form, it is better to ask the bank before filling it out. Once you are done with it, submit the form.
6. Be aware of hidden charges and fees
Once you have submitted your application, you will receive paperwork from the bank. Make sure you review all the terms and conditions carefully to avoid any hidden charges or fees that can increase your loan amount.
7. Get approved for a private student loan
After filling out an application form, waiting patiently for a response from a lender, and going through the required paperwork, it’s time for you to get approved for a private student loan! Once you have been approved for a loan, the lender will transfer money to your school.
8. Paying back your private student loan
Once you get a private student loan, it is important for you to be aware of the repayment period and other charges. The bank will send you an email or letter that tells you about the amount that must be paid back. You should also know if there are any penalties or charges for not making monthly payments on time.
Federal student loan vs Private student loan
Federal loans are the safest option when it comes to taking out a loan for college if you are eligible for them. Federal student loans typically have lower interest rates compared to private student loans, they do not require a co-signer, and you will not accumulate any additional debt if your student situation changes.
Private student loans may be used for continuing education or for students who do not qualify for federal loans. Before applying for a private student loan, make sure that you understand the terms and conditions of your lender or bank. You can get your credit report and score from all three major credit bureaus: TransUnion, Experian, and Equifax to help you find a suitable lender.
Note: Consider getting a private student loan only when you don’t get approved for a federal student loan or your federal student loan is not enough for your education expenses.
Advantages and Disadvantages of Taking Private Loans
Private students are great alternatives for students who have a bad credit history or have applied for a federal loan but did not get approved. But they do come with both pros and cons that must be considered before applying for them.
1. Private student loans give you the freedom and flexibility of choosing your own loan amount and loan duration.
2. You can get rewards for having good credit. Your interest might get lower if you have a good credit history.
3. You get more freedom to use the money that you borrow in any way you want during your college years.
4. You can apply for a private student loan anytime you want. No matter if you are in the middle of your college career or if you are graduating, you can still apply for a private student loan.
5. Private student loans can be used to repay your previous student loans.
7. Ideal for students who have a bad credit score or didn’t get approved for federal loans.
1. You will be charged with higher interest rates than if you get a federal loan.
2. You are required to have a co-signer if you have a bad or no credit history with most lenders.
3. It is essential that you review all transaction and loan terms with your lender to avoid any misunderstandings or miscommunications.
4. You may not be able to change the duration of your repayment without increasing the interest rates
A few things to consider
- Opt for private student loans only if you don’t qualify for a federal student loan
- Compare multiple lenders and banks before finalizing a lender
- Borrow only what you need to stay in school and pay for your education expenses
- Don’t miss out on any repayment term and make sure you repay your private student loan on time
- Find a co-signer if you need one
- Read the terms and conditions carefully before signing any agreement
So there you have it! A private student loan is great if you don’t qualify for a federal student loan. Make sure you consider all options before you apply for a private student loan. Always review the terms and conditions with your lender before you sign anything.