Private student debt is not the first destination when students need financial aid for their educational costs. Federal student loans usually have more benefits and conveniences for the borrowers. However, if a federal loan is not accessible or sufficient, students might view private student loans as their last resort.
Private financial institutions like banks provide private student debt. Different from federal loans offered by the government, each private lender has its requirements and application processes. Yet, some eligibility elements and application details can still be similar, which we discuss thoroughly in this guide.
Pros of Private Student Loans
Private student debt can be tricky when it comes to its benefits. Depending on the lender, the benefits can change. However, some can be similar. For example, private lenders usually provide higher loan limits for borrowers. When the federal loans’ annual caps are insufficient, you can use private loans to fill in the gaps.
Next, some lenders provide a quick application and disbursement process. You do not need to wait a long time to get funds from private lenders. Additionally, you can apply whenever you wish.
Compared to federal student loans, private loans have more drawbacks. For example, you can get multiple repayment options for federal debt. Repayment options like Income-driven repayment require a minimum interest rate which makes it affordable to borrowers. However, these options are not accessible to private lenders.
Next, there is almost no loan forgiveness for private student debt, while programs like Public Service Loan Forgiveness exist for federal debt.
Besides, government-supported benefits do not apply to private debt. For instance, currently, the Education Department does not collect repayment due to COVID-19. This non-repayment period will continue till February of 2022. Thus, while federal borrowers are protected from the negative impact of a pandemic on the economy, there is no protection for private student loan borrowers.
When to Apply for Private Student Debt?
Private student loans help borrowers to finance their educational goals. However, compared to federal student loans, they come with more drawbacks. Federal student loans are cheaper, and they provide many benefits like loan forgiveness, forbearance, different repayment plans, etc. Hence, people in need of financial aid need to give priority to federal student debt.
It is advisable to apply for private student loans only when you have exhausted all your federal options. For example, if you do not qualify for federal loans, you can consider private loans. Alternatively, if you received federal student debt but still need money for other educational expenses, you can look for private lenders.
Compared to federal student loans, private student loans have a longer list of eligibility requirements. Depending on your lender, the requirements will change. However, there exist some common conditions that almost all borrowers should meet.
1. Loans for Educational Purposes
One of the main conditions to get private student loans is the purpose. The loan should only be used for educational expenses. Usually, lenders define what they mean by educational costs. First, they generally contact the schools to determine your cost of attendance. Then, they send the tuition and similar fees directly to the school.
If any amount is left, it might be disbursed to borrowers. In this case, borrowers can decide how to use this money, but still for educational costs. For example, you can spend money to purchase books, supplies, or equipment needed for your field. Additionally, it can be used to afford transportation and accommodation costs.
Note: Keep in mind that you will return any funds from private lenders with interest payments. Hence, it is advisable to get only the amount that you need to minimize your loan repayment in the future. Of course, spending extra money can ease your life, but you would not want to struggle with debt obligations when it comes to repayment.
2. Basic requirements
Before we explain special conditions, we need to ensure you meet basic requirements. Those conditions are related to your age, citizenship, education status, etc. For example, borrowers need to be at least 18 ( this threshold can be higher in some states) to take a loan. Besides, a high school diploma can be required.
Usually, lenders require applicants to be U.S citizens or hold a similar residency status. A Social Security Number is most likely to be required. Therefore, if you are an international student, you might find it hard to get private student loans. However, it can be easier to agree with the lenders if a student has citizenship, permission to live permanently, or a cosigner who has U.S citizenship.
3. Enrollment in a Qualifying School
It should be no surprise that private student loans require borrowers to be enrolled in a qualifying school. Unfortunately, not all types of education are eligible for financial support by private lenders. For example, if you are registered for a four-year college degree, you have a higher chance to request private loans.
However, two-year community colleges or similar trade schools might not qualify for these programs. Yet, you can find private student loans designed explicitly for such types of educational programs. For instance, Sallie Mae has career training loans if you are in a two-year program.
It is advisable to contact your preferable private student loan lender and determine your school’s qualification before application. Your school’s financial aid officers can also give you more information on which lenders provide loans for that school.
When federal loans are distributed, the borrowers’ income level and credit score mostly do not matter. As students usually do not have well-paid jobs or credit history, it is not reasonable to ask for these requirements. Besides, the Education Department wants to make it easier for students in need to get funding for their educational dreams.
However, private lenders are more concerned about the credibility of borrowers. They have to ensure that (at least try to) the borrower will repay the debt in the future. Hence, they mostly require a stable income source and good credit performance.
- Credit history- most private student loan lenders are looking for 600 or more credit scores. Your credit score depends on total debt amount, repayment history, number of accounts, etc. If your credit score is, even more, you will find private student loans easily and qualify for lower interest rates.
- Stable income- besides good credit standing, applicants should also have a stable income source. Usually, lenders calculate the debt-to-income ratio by knowing your salary. If the debt-to-income ratio is low, there is a high chance that you will repay the debt quickly. However, a high ratio indicates that you can face challenges in repayment, which is not desirable for lenders.
Previously we mentioned that international students who do not satisfy citizenship status could involve a cosigner. A cosigner is a third party like a family member or a friend. Cosigners agree that if the borrower does not repay debt, they will do so. Hence, cosigners should also have a good income source and credit score. In case of repayment, the credit score of cosigners will also be damaged.
Specifically, if you need private student loans for bad credit, the cosigner is almost always required. The reason behind this requirement is that bad credit indicates that the borrower is risky- he or she might not be able to repay the debt. Hence, lenders want to minimize their risks and require a cosigner. In this case, if the borrower does not repay the debt, the cosigner will be obliged to repay it.
Some lenders also provide a “cosigner release” feature on private student loans. This feature allows borrowers to release the cosigner after making a certain number of payments. In this way, the borrower proves credibility, and the need for a cosigner disappears. For example, CommonBond might release the cosigner if debtors repay debt for 24 months consecutively. So, if you meet this requirement, your cosigner will just walk off the obligation.
Application for Private Student Debt
As mentioned before, students need to first exhaust their federal student loan options. If this option is not accessible or enough, you can look for private lenders. In this section, we will discuss how to apply for private student loans in case you decide to cover a financial gap with private debt.
1. Analyze Different Offerings
Before you apply for a particular option, it is necessary to check different lenders. The government provides federal loans. Hence, the conditions for these loans are the same for all borrowers. However, private lenders offer private student loans. Each lender has its terms and conditions regarding interest rate, repayment plans, limits for borrowing, etc.
Therefore, you need to do a market analysis and compare the offerings of various lenders. In this way, you can choose the most suitable loan for your budget. You can easily find information about offerings on private lenders’ websites.
Besides, you can ask your school’s financial aid officer to determine which lenders partner with the school or offer loans to its students.
2. Is it the Right Time for Application?
Federal student loans have exact deadlines for application. However, you would not face such restrictions for private debt. You can get private student loans before the academic year starts or during the year.
You need to apply for loans sometime before your payment deadline is. Do not expect that you will get loans in a few days. It usually takes around a month until your application is reviewed and approved and the loan is disbursed. The process can also take longer, so discuss the timing with the lender.
It is generally advised to start estimating your need for financial aid and looking for cosigners at least 90 days before the school’s payment deadline. Besides, around 60 days before the deadline, find different lenders and contact them to get complete information. In this way, you can compare offerings and choose the most suitable one. Next, when there are around 30 days left, apply for private student loans. The process can take longer, so discuss the timing with your lender. Lastly, if there are ten days left, check for confirmation that funds are received.
Additionally, if you need loans for multiple semesters, you need to apply again in the future. When you reapply, you need to follow all discussed details all over again.
3. Gather Documents
When you apply for private student loans, you will be required to provide a lot of documentation. Hence, be patient as paperwork can take some time. However, if you have all the necessary documents ready, the application and approval will be straightforward.
You will need to provide your Social Security number, contact details, addresses, employment details, including recent pay stub, gross annual income, list of assets, tax return, etc. Besides, educational information like graduation date, cost of attendance, and estimated financial need can be required. Therefore, it is better to ensure that you can provide all these details before filling the application. Knowing all these details and submitting related documentation fast will make the process easier.
Keep in mind that a Self-Certification form for private student loans offered by the Education Department also exists. This form helps borrowers to understand their options better. You can request the paper from the school’s financial aid officer.
4. Apply Officially
Finally, it is time to express your request to private student loan lenders through the official application. As mentioned before, having documents ready will help you finalize this process quickly.
Each lender has a different process for application. However, some techniques are still similar. For example, usually, an application starts with personal questions like citizenship, age, etc. These questions can also relate to a cosigner if required. Next, questions regarding financial standing such as tax return or pay stub will be required. Besides, educational information- a type of education, school, cost of attendance- will be asked.
Lastly, you might be asked to provide contact details for personal references. After filling in all this information, it is time to agree to the terms and conditions of the lenders and give consent to the credit history checking process. Depending on the lenders, it can take a few days, weeks, or months to get approvals.
Is Getting a Private Student Loan a Good Idea?
We previously explained the pros and cons of private student loans. As visible, this type of student debt has more disadvantages than advantages. However, some conditions can make private debt unavoidable and easier. For instance, if you have a good repayment plan, you can apply for private student loans. Furthermore, in case you believe that you will get a well-paid job in the future, you can get rid of the debt quickly. Besides, before application, you need to exhaust all your federal financial aid options. Sometimes, borrowers realize that their educational costs are increased due to accommodation, transportation, supply expenses, etc. If the federal loans do not cover these expenses, you can get private student debt to cover the gap.
How to Choose the Most Suitable Lender?
It is essential to compare different lenders’ offerings before deciding how to finance your education. In this way, you can find the most suitable lender based on your needs- fastest repayment, lowest interest rate, etc. Therefore, we discuss some elements that you need to look for before deciding on your lender.
Fixed vs. Variable Interest Rate
Fixed interest rate loans have the same rate throughout the repayment period. However, the variable interest rate is tied to a different element and can decrease or increase. Sure, the decreasing rate in the case of variable rate is more desirable, but there is no guarantee. Therefore, before applying for private student loans, you need to decide which option you would like.
Interest rate indicates how much extra you will pay for your loan or, generally, how much the loan costs you. Sure, it is more desirable to have the lowest interest rate possible. Usually, borrowers with high credit scores and stable income can qualify for low rates. Meanwhile, if you want private student loans for bad credit, you should expect higher interest levels. Yet, the rates also depend on the lenders, so check various options.
It is also a good idea to check additional features offered by lenders. For example, some lenders allow “cosigner release.” If you make a certain number of payments, you might release the cosigner. As a result, the cosigner has no more obligations for your loan. Besides, another feature can be Auto-pay. If you agree to auto-pay, the lenders of private student loans deduct monthly payments directly from the borrowers’ accounts when it is time for repayment. In addition, this feature might allow for a small interest deduction.