If you’ve used all your Stafford federal student loan and financial aid options, you might consider taking out a private student loan to help close the gap for education costs.
Who Should Borrow Private Student Loans
While the federal loans and the federal PLUS loans may have lower interest rates, flexible repayment terms, and are highly accessible to students, sometimes federal loans just don’t provide enough money to complete your degree(s).
Both undergraduate and graduate students who have already maxed out their federal aid can consider private student loans for education costs. Private loans can be a little harder to qualify for than federal student loans, and rates may range from 5.75% to more than 11% depending on your profile.
Using a cosigner may help provide a lower APR or help a student borrower get approved.
When Should You Apply for Private Student Loans?
Before you decide you need a private loan, make sure you have explored other education funding options first.
Apply for Federal Student Aid for Scholarships and Grants
To apply for federal student aid, file a FAFSA (Free Application for Federal Student Aid), to see whether you qualify for any grants, work-study programs, or other financial aid like federal loans. Check with the financial aid office at your school for help with filing the FAFSA and read our guide about how to complete your FAFSA too.
After you have applied for financial aid with the FAFSA, start exploring other financial aid or grant options. This is preferable to taking out a loan, because you don’t need to pay back financial awards. Check with your school to see if there are aid packages specific to your major or degree as well.
Apply for Private Loans To Close the Financial Gap
If you’ve truly used up all the aid available to you, it’s time to check out your private student loan options. If you have a solid credit history, have maxed out your federal aid, and still need tuition assistance (and possibly help with room and board, books, and other school-related expenses) you’ll want to begin looking for a private loan.
How to Choose a Private Student Loan Lender
While you may want to go with the first lender to send you a quote, you should also take a look at the other fees and terms that come with that loan before signing.
Assess Loan Fees
A loan with no fees sounds great, but beware of higher rates: the fees might be simply rolled into the APR. Still, high-fee, low-rate loans aren’t always the best deal, either. It all depends on the terms of the loan. Here’s a good rule about loan fees to remember: if the lender charges 3-4% in fees, it equals about a 1% higher interest rate over the life of the loan.
Compare Interest Rates
A good rate on a private student loan should be competitive with the current interest rate of a Federal PLUS Loan. To get the best rates, you’ll need a good track record of financial responsibility, and possibly a cosigner with excellent credit, as well.
When completing an eligibility check, you will also see that you can select a fixed or variable interest rate for your loan. While a variable interest rate may start out lower than a fixed rate, it could go up or down over the life of the loan as its underlying reference rate changes. In comparison, a fixed interest rate will stay the same during the term of the loan.
Do You Need a Cosigner?
If you don’t have enough of a credit history yet to have a good credit score, you may need a cosigner. This is someone who will be equally responsible for guaranteeing the loan — maybe a parent, or another older relative with strong credit. First, find out if you’ll need a cosigner; then find out what the requirements are for that person.
Consider the Repayment Options
Some loan providers will offer different repayment plans to better fit with your income schedule. You might also want to see what the options are for ‘skipping a payment’ if you come under financial hardship. Finally, confirm with your lender that you would not be penalized if you decide to repay your loan ahead of schedule.
Now that you know the basics of private student loans, you’ve got the prerequisites needed to continue to the next course: finding the right loan for you.
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