Investigating Private College Loans
Private loans can help pay for college — but you need to shop wisely and understand how private loans work. Here are some things to know and questions to ask before taking out a private student loan.
What is a private student loan?
Unlike federal student loans, which are funded and regulated by the federal government, private loans for college are made by private organizations, such as banks, state agencies, credit unions, and colleges and universities. With federal loans, interest rates, fees, and payment terms are set by law. With private college loans, they are set by the lender.
How do private student loans work?
Generally, private loans for college students have less flexible repayment terms and higher interest rates, but the options vary widely depending on the lender, the type of loan, and your credit rating. It is important to understand the terms of any private student loan you’re considering and to talk to several lenders to compare loan terms and interest rates. Here are some important facts about federal vs. private student loans.
1. Private Loans for College Have Fixed or Variable Interest Rates
Federal student loan rates are fixed, which means they will not change for the lifetime of the loan. This helps you predict what your payments will be after graduation. Some federal loans are subsidized which means the interest is paid by the government while you are in school.
Private loans can have fixed or variable interest rates. A variable interest rate can reset every month or quarter, causing your monthly payments to change.
2. You’ll Need Good Credit or a Cosigner to Qualify
Apart from PLUS loans, federal student loans don't require a credit check, so minor credit problems won’t prevent you from qualifying. Private lenders, on the other hand, will consider your credit history when reviewing your loan application.
Because students usually have a limited or no credit history, they usually need to have a parent or other adult serve as the cosigner of the loan. The cosigner is responsible for repaying the loan if the student fails to pay, and any missed payments may negatively affect their credit.
According to the Consumer Financial Protection Bureau, some private lenders advertise very low interest rates but in most cases, only borrowers with the best credit will qualify for them. If you don’t have good credit, it’s likely that you will pay much higher interest rates and fees.
For example, FinAid.org reports that borrowers with bad credit can expect interest rates that are as much as 6% higher, loan fees that are as much as 9% higher, and loan limits that are two-thirds lower than advertised. Lenders may advertise a lower interest rate while you are in school but enact a higher interest rate once you graduate.
3. Loan Repayment Options Differ
Federal student loans have flexible repayment plans and loan forgiveness options. Federal loans also don’t require students to begin repaying their loans until six months after they graduate.
Private lenders can set their own loan repayment and loan forgiveness terms. Some offer similar repayment and forgiveness options to federal loans, but they are not required to do so. For example, some lenders may require you to start repaying your loan as soon as you graduate from college, or even while you are in college.
4. Get Federal Loans First
Federal student loan rates, terms and repayment options are generally more favorable than private loans. The Consumer Financial Protection Bureau, the US Department of Education, and financial advisors usually recommend that families look at private loans as a last resort after borrowing the maximum amount in federal loans.
Before taking out a private loan, discuss the matter with your college’s financial aid office. The college may have a relationship with a private lender that is willing to offer favorable terms on loans made to students attending that college. Also, don’t overlook nonprofit credit unions, which sometimes have the lowest interest rates and low or no fees.
Questions to Ask When Considering Private Student Loans
When shopping for a private student loan, it’s important to carefully read the fine print of your loan contract and ask the right questions of the lender. Here are some questions to ask a lender when considering a private college loan:
Interest Rates and Fees
- What is the interest rate? Is it fixed or variable and if it is variable, how is it determined?
- What is the lowest interest rate and fee combination that you offer? Is the rate for a limited period or for the duration of the loan?
- Is there a limit on how high the rate can go?
- How often is the rate adjusted, and how is it determined?
- What is the lowest rate you offer on a fixed-rate loan?
- What additional fees will I be charged for the loan?
- When do I have to start repaying the loan? How long do I have to pay it off? Is there a penalty for repaying the loan early?
- If I do not have to begin repaying the loan while in school, how much will I owe when I do start making payments?
- If I have difficulty making payments, may I defer or reduce my payments temporarily? Under what circumstances and for how long?
- What discounts do you offer? Some lenders provide loan fee or interest rate discounts when you sign up for autopay, or if you have another account at the same bank.
- Are your discounts guaranteed, or are they subject to change later?
- Do you have a cosigner release form? You might be able to release your cosigner from the loan after you make a certain number of on-time payments or your credit improves.
Getting a private loan for college is a big decision. Be sure to thoroughly research different private loan options and lenders so you can make the best financial decision for your needs.
The 1st Financial Bank USA (1FBUSA) Student Loan Repayment and Affordability Calculator can help you figure out what your loan payments will be based on the terms of your loan, including interest rate, and give you an idea of how much of your expected future salary will go toward paying off your loan(s).