Student Loans: Private Loans

Private student loans come from banks, credit unions, state agencies, colleges and universities. Some of these institutions specialize in student loans; others offer numerous types of loans and student loans are just one of their products. As of November 2017, some well-known private student lenders include SunTrust, Discover, Wells Fargo, College Ave, Sallie Mae, Citizens Bank, LendKey, and PNC and JPMorgan Chase. 

You might want to consider a private student loan if:

– you don’t qualify for any federal student loans; or

 – you don’t qualify for enough in federal student loans to meet your school’s cost of attendance;

– and your future career path will allow you to earn enough money to comfortably repay these loans, which can be more expensive and have fewer benefits than federal loans.

Private vs. Federal Loans

If you’re considering a private student loan, you should understand the key differences between federal and private loans. In general, federal loans are easier to qualify for in that they don’t require a credit check, but they are not necessarily easier to obtain because of demonstrated need requirements and limits on available funds. Federal loans also have more flexible repayment options and often have low fixed interest rates. The chart below shows how the two compare.

If you have a federal student loan, it may be forgiven, canceled or discharged under certain circumstances, meaning you don’t have to repay your remaining balance. These circumstances include reaching the end of an income-based repayment plan, completing a number of years of teaching or public service, becoming permanently disabled or dying. You or your estate may still have to pay taxes on this debt, however, which can come as a shock to borrowers and their families. (See Debt Forgiveness: Escape Your Student Loans.) 

With a private student loan, forgiveness is not an option. Discharge may rarely be possible through bankruptcy. Policies on cancelation in the case of death or disability vary by lender. And many private student loans require cosigners since the student has little to no credit history or income. If the student becomes disabled or dies, the cosigner can be held liable for the remaining debt and the debt can be accelerated and due as a lump sum. Some students' families purchase life insurance to cover their cosigners for just this reason. (See What Happens to Your Student Debt If You Die?)

Qualifying for Private Student Loans 

You’ll usually need to pass a credit check to qualify for any private student loan. Lenders may have minimum credit score requirements that borrowers must meet. If you’re a young adult with no credit history, a cosigner may be the only way to qualify. Even if you do have a good credit score, getting someone (usually a parent) to cosign on your private student loans can improve your chances of approval and help you get a lower interest rate. Both you and your cosigner must understand the consequences of cosigning. (See Does cosigning a loan affect a credit score? and Getting a Loan Without Your Parents. Parents and grandparents should read Seniors: Before You Cosign That Student Loan.)

To qualify for a private student loan, you’ll also need to be seeking a degree, be enrolled at least half-time, be attending an eligible school and be making satisfactory academic process. If you meet the lender’s debt-to-income requirements, you may be able to borrow as much as you need to meet 100% of your school’s cost of attendance after subtracting your other financial aid. Private lenders may have aggregate loan limits and require applicants to be U.S. citizens or permanent residents.

Private Student Loan Contract Terms

Your private student loan will either have a fixed or variable interest rate. If your interest rate is fixed, it will not change once you’ve signed your loan papers. If your interest rate is variable, it will change based on a market index such as LIBOR (the London Interbank Offered Rate) or the prime rate. It’s important to understand how often your lender can change the interest rate, how much your rate could increase and how rising interest rates could affect your monthly payments and total borrowing costs. Many private lenders offer both fixed- and variable-rate loans and you’ll be able to choose. You may also be able to choose your repayment term and release your cosigner after several years of on-time payments.

Your loan may have an in-school or deferred-repayment option that allows you to postpone making loan payments until after you graduate or make interest-only payments until you graduate. Some private loans offer rewards: interest rate discounts or cash back for good grades, consistent on-time payments, or having a checking account with the same bank that issues your loan.

Private Student Loans And Financial Hardship

You may have to meet specific requirements to qualify for a private lender’s financial hardship program. For example, let’s say you’re in the first three months of your repayment period. You’ve just graduated and haven’t been able to find a job. The lender might agree to extend your grace period by three more months. If you’re already making payments, you may be able to secure a lower monthly payment or temporarily postpone your monthly payment while interest continues to accrue. Payment extensions, forbearance and interest rate reductions are also possibilities. 

In the next section, we’ll discuss repaying your student loans.