Private College Loans: Everything You Need to Know Before Borrowing

Private college loans are becoming increasingly popular, with student loan debt statistics showing private student loan balances on the rise. In fact, students borrowed $7.8 billion in private student loans in the 2014 to 2015 school year, according to a 2016 report from the Institute for College Access and Success.

Private student loans can provide necessary funding when you have no other options to pay for school, but they can be more expensive than federal loans and have other downsides compared to federal student loans.

If you’re looking into how to apply for private student loans, we’ve compiled a few important facts to help you decide if private college loans are right for you.

Important facts about private student loans

Both parents and students can apply for private student loans. Here are seven key things you need to know before applying.

1. Private student loans provide extra funding for college after maxing out federal loans

Federal college loans, including Subsidized Direct Loans and Unsubsidized Direct Loans, should be your first choice for college funding. There is a maximum limit to federal student aid, but once you’ve hit that maximum limit, it’s time to consider private loans.

Unfortunately, the 2016 report from the Institute for College Access and Success analyzed the most recent year for which data was available and discovered 47 percent of private student loan borrowers borrowed less in federal loans than they could have, instead opting for private loans. These students lost many of the perks and protections that would have been available to them if they’d borrowed more federal funds.

Before applying for any private loans, complete your Free Application for Federal Student Aid (FAFSA) — this guide to filling out your FAFSA can help — and make sure to exhaust federal Direct Loan options first.

If federal aid and other sources of funds such as scholarships and grants do not cover all of your college costs, private loans can pay the difference.

2. Private loans for students are harder to qualify for than federal student loans

Almost anyone can qualify for federal student loans, as long as you meet basic eligibility criteria such as being accepted to an approved program and not being in default on student loans.

Private student loans, however, require you to qualify based on your credit score. Private lenders also look at your debt-to-income ratio, which is the number of monthly debt payments compared with your monthly gross income. If you don’t have enough income, private lenders will not approve a loan.

According to the Consumer Financial Protection Bureau’s 2015 report, 90 percent of private student loan borrowers who did not have a cosigner had their applications rejected. Since many students don’t have much or any income, and because they often lack a credit history, lenders might require students to have a cosigner to qualify for private student loans.

The CFPB also indicates that even if borrowers can qualify independently, applying with a cosigner could potentially result in a lower interest rate.

Because a cosigner may be required, students whose parents or other family members aren’t able or willing to cosign may be closed out of access to private student loans unless they can work, build a credit history, and qualify on their own.

3. Interest rates and loan terms vary among private student loan lenders

When you apply for federal student loans, the interest rate is determined based on loan type. This chart shows current interest rates for federal loans.

Loan Type Borrower Type School Year 2016-17 School Year 2017-18
Direct Subsidized Undergraduate 3.76% 4.45%
Direct Unsubsidized Undergraduate 3.76% 4.45%
Direct Unsubsidized Graduate/Professional 5.31% 6.00%
Direct Grad PLUS Graduate/Professional 6.31% 7.00%
Direct Parent PLUS Parent 6.31% 7.00%

When you apply for private student loans, there is no standard interest rate. Instead, different private student loan lenders set their rates. The rates individual applicants receive vary depending upon their credit scores, incomes, and credit history. As of June 2016, the Institute for College Access and Success reported rates as high as 13.74%, which is considerably higher than rates on Direct Loans.

Private student loans may also have variable interest rates, rather than fixed rates. With a variable rate loan, the interest rate is usually influenced by LIBOR or Fed interest rates. If interest rates rise, monthly payments and interest costs could go up, making your overall costs higher.

4. Private student loans offer less flexibility in repayment plans

When you obtain college loans from the federal government, you have many different repayment options, including income-driven repayment arrangements, and a standard or graduated repayment schedule. Because you have various options, you can choose the repayment plan that works for you.

Private student loans typically have fewer choices for repayment and do not offer repayment plans based on income. If you can’t find a job after graduation or if your income is low, you’ll still be expected to repay the private loan based on the payment amount agreed to when you borrowed.

5. Private college loans don’t offer loan forgiveness

Students with federal loans can be eligible for public service loan forgiveness if they fulfill specific requirements related to work and payment history. Students on income-driven plans can also have remaining balances on their debt forgiven after 20 to 25 years, depending upon the program — although forgiven debt is taxable as income.

Private loans for students do not provide loan forgiveness options. Even if you work your whole career in public service and have your federal loans discharged, you will still be expected to repay your private loans in full.

6. There are fewer options for financial hardship with private student loans

If you find you’re struggling with payments on your private student loans, you have more limited options than with federal student loans.

Not only are you unable to cap your payments at a percentage of income, as you would be able to do on an income-driven plan with federal loans, but you also cannot put private loans into deferment or forbearance.

7. Private college loans are difficult to discharge in bankruptcy

Although private student loans are not offered or guaranteed by the federal government, they are still treated differently than many other kinds of consumer debt. Like with federal loans, it is very difficult to discharge private student loans in bankruptcy, as Josh Cohen, a Vermont-based attorney told Forbes.

Private college loan cosigners could still be held responsible for repayment even if the student suffered extreme hardship that justified discharge in bankruptcy.

How to apply for private student loans

If you’ve decided to apply for private college loans despite the drawbacks, you’ll need to know how to apply for private student loans. You should shop around for different private student loan lenders and compare:

  • Eligibility requirements
  • Application fees and origination fees
  • Interest rates and available interest rate deductions or discounts, such as a reduced rate for automated payments
  • Loan terms, including repayment term and prepayment penalties
  • Reviews of the loan servicer

You’ll also need to gather information including details about your income, your tax returns, and information about your financial assets. With this information in hand, you can apply for loans with different banks, credit unions, and other financial institutions.

You can start by looking at our private student loan marketplace to see what types of loans lenders are offering. If you think you’ve found the right loan, apply for the money necessary to cover the costs of your schooling that federal loans won’t pay for.

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