Why You May Need a Private Student Loan & How To Find The Best Private Student Loan For You.
College and university costs keep rising. It costs $38,589, on average, for tuition, fees, room and board at a four-year, private college, according to the College Board. By comparison, a four-year public institution averages $17,131. No matter how much you or your family save, the chances are high that you may need student loans to pay for college.
This article will help you understand the main features of private student loans, so that you will be better equipped to apply for a private student loan.
Two Steps to Take Before Finding a Private Student Loan
Even though federal loans make up the bulk of college financing, federal student loans are limited. The maximum yearly federal student loan amount is less than the average costs for may tuition, fees, room and boarding costs for all students. Bills.com is here to provide you with information about private student loans, so you can make informed decisions. Begin by following these two steps:
- Create a realistic and complete budget
- Apply for federal aid and federal loans
You will be ready to look and apply for a private student loan after completing these two steps.
1. Step One: Start with a Good Budget
To keep your finances in order, you need to create an education budget. (Bills.com offers a budget tool for your everyday needs, which will help you control your expenses, something most students need to do). Your college budget includes calculating for the upcoming academic year all your costs, including tuition, fees, housing, living expenses, medical, books, computer, internet, telephone and travel expenses. Leave room for unexpected costs. Calculate your sources of income including, savings, current income, and gifts. Make up any shortfall through grants, scholarships and loans.
2. Second Step: Federal Aid and Federal Student Loans
When looking for student loans, first look closely at federal student loans. Federal student loans account for the majority of student loan borrowing. In the academic year 2010-2011, there were close to $100 billion of federal student loans and only about $8 billion in private student loans. Here are some numbers relating to federal student borrowing in the 2010 academic year:
- Stafford loans: 8.7 million borrowers averaging $3,658 for subsidized and $4,094 for unsubsidized loans
- Plus and Parent Plus: 884,000 borrowers averaging $11,484 per loan
Your first stop for federal student loans is Bills.com page getting a federal student loan. Your next stop will be the Dept. of Education's Free Application for Federal Student Aid (FAFSA) form. Once you have determined your eligibility for federal loans, and have exhausted other funding alternatives, you can begin looking for a private student loan.
When you apply for a private student loan, you must present your FAFSA self-certification form (PDF). The purpose of this form is to make sure that you do not borrow more than you need. You must fill out information about the total cost of schooling, including tuition and living costs, and the estimated amount of financial aid you expect to receive. Once you use other financing, you may jeopardize your rights to federal financial funding.
Private Student Loans: Important Information
In this section, you will learn about the most important features of private student loans, including:
- What is special about private student loans?
- How do I get a private student loan?
- What are the types of private student loans available?
- What are the general eligibility requirements?
- What are the terms of a private student loan?
1. What is special about a private student loan?
A private student loan is an unsecured loan, meaning that the lender’s only security is you, the borrower and your ability to repay the loan. This is similar to credit card debt or a personal loan. This is different from a mortgage or auto loan, which has an underlying asset as collateral. If you default on a student loan, the lender can seek to obtain a court judgment in order to garnish wages, place a bank levy, or a lien on your personal property. Unlike a federal student loans, which have no statute of limitations (SOL), state laws that pertain to written contracts, will determine private student’s SOL. (For more information about student loans and the collection process see Bills.com page about default on private student loans).
However, and this is important to know, student loans are generally not dischargeable in a bankruptcy, except under cases of undue hardship. When you take a student loan, you take upon major, long-term responsibilities. Do so carefully.
2. How do I get a private student loan?
Shop! Shop! Shop! This is a rare time in your life when shopping is the solution to your problem. Make sure to shop around for the best loan.
There are a number of private student loan lenders, including Sallie Mae, the largest private school loan lender. Sallie Mae originated $2.2 billion of private student loans in the academic year 2009-2010. This totaled 29% of the $7.7 billion total private student loan market. Although Sallie Mae is the largest lender, there are other lenders offering student loans, such as Citigroup, Wells Fargo, Chase, and Discover. In general, private student loans have declined in market share since 2007, when the government increased the levels of federal student aid and loans it grants. Some lenders have left the market, but there is still plenty of competition.
3. What are the types of private student loans available?
The private lenders offer different private student loan programs, including for the following groups:
- Undergraduate students
- Graduate students
- Graduate students in health-related or law programs
- Parents (or other family members or friends) aiding undergraduate and graduate students.
The private lenders often brand their products under names like Sallie Mae Smart Option Student Loan, CitiAssist, Discover Certified Private Loan for Graduates, Wells Fargo Collegiate Loan, or Chase Select Private Student Loan.
4. What are the general eligibility requirements?
All lenders require a borrower who meets their eligibility requirements, including minimum income, credit score and debt to income ratio. In addition, age, citizenship, state residency, and references will influence the lender’s decision.
Lenders publish information regarding there student loan programs, but keep them vague, waiting for you to apply for a private student loan before giving order to give you the full story. Here a few examples illustrating general borrower requirements:
|Lender||Income||Credit Score||DTI (Debt to Income Ratio)|
|Wells Fargo||A minimum income of $12,000 per year.||An established and positive credit history||An acceptable debt-to-income ratio|
|Citigroup||Depending on your credit, you may have to verify that your income is at least $1,500 per month ($18,000 per year) and requirements will vary.||Creditworthy with a satisfactory credit history that includes at least 12 months of||Debt-to-income ratio is less than 45%.|
|Discover||At least 3 years of credit history.|
Sallie Mae also offers private student loans.
Obtaining a cosigner for a private student is a necessity for many borrowers, as the private student loan lender has strict income and credit requirements. The need for a cosigner is is an important difference between federal student loans and private student loans. The cosigner assumes personal responsibility for the loan. All lenders encourage having a cosigner on a student loan, even if the student qualifies on his own. Having a cosigner enables the student to receive a lower interest rate. Each borrower is independently responsible for the whole loan, for the entire period of the loan. Although lenders will often have a clause allowing for the release of the cosigner, read the clauses carefully. The lender will generally release a cosigner only if there is a perfect payment history and certain credit or income requirements are meet at the time of the release.
5. What are the terms of a private student loan?
The general terms of a private student loan are as follows:
- Length: The length of a private student loan is generally 60-180 months (5-15 years)
- Interest Rate: Most loans are offered at a variable rate, although sometimes a fixed rate is available.
- Repayment Terms: Private student loans are paid back monthly. Generally, a grace period is available while the student is enrolled as a half-time student. The repayment of the student loan will begin six months after finishing, or leaving school. If you choose a full grace with no payments at all, then your balance will continually grow. However, if you make interest payments throughout the school period, then you will owe exactly the amount you borrowed. While a grace period is convenient, it will make for greater payments afterward. In general, parent student loans are paid immediately.
- Maximum Amount: Generally, the maximum amount lent is equal to your total academic year costs, less the amount of scholarships, grants, federal aid, and federal loans to be received.
- Fees: Many times, there are no fees. The amount of fees charged will vary from lender to lender and will depend on the borrower’s (and cosigner’s) credit history.
- Reward Programs: Many lenders offer special reward programs to encourage the student to begin making payments, even partial payments.
When looking for the best student loan, remember to follow these steps:
- Prepare a budget and remember to save money early in the child's life, and often.
- Follow the steps to get federal student aid and federal student loans.
- Shop around for a private student loan to find the lowest interest rate.
As you move through the student loan cycle, you will find that Bills.com offers many resources and information regarding student loans, including consolidating student loans and dealing with problems paying student loans.