Choosing a Private Student Loan

Some private student loan lenders don’t have caps on the amount of money you can borrow from them, but your school may. As you evaluate what loan suits you the best, find out how the loan will be disbursed and what costs it will cover.

Don’t wait for your school to decide how much of a loan you can handle. Do the due diligence yourself. Experts in college financial planning recommend borrowing no more than what you’ll most likely earn in your first job out of college. This is intended to protect you from having unmanageable monthly payments.

When picking a private student loan, there are a few things you should review like the interest rate, its terms for cosigners, any discounts and payment options. Below are some terms for you to become familiar with.

1. Interest Rates

Private student loans usually have variable and fixed interest rates that are based on the borrower’s creditworthiness. If you have great credit, then you’ll be eligible for a lower interest rate. But if you have bad credit, then prepare for a high interest rate.

The variable rate, which fluctuates, works in conjunction with a fixed-rate the lender sets that are based on your credit history. The fluctuating percentage rate, also known as an adjustable rate, rises and falls according to the index they follow.

2. Cosigner Release

Most traditional college students don’t have a long credit history, so they turn to a relative to cosign for their loan. A cosigner is an individual who is willing to use their good or excellent credit history to help someone get a loan that he or she does not qualify for alone. This is no small gesture. If the borrower can’t make payments on the loan, the lender seeks payment from the cosigner. If the borrower defaults on the loan, it affects the cosigner’s credit.

Some private loans offer to release the cosigner from the loan after the borrower makes a certain number of payments or meets other requirements.

3. Autopay Discounts

One of the quickest and easiest ways to reduce your interest rate is to sign up for automatic payments or withdrawals. Autopay can reduce your interest rate by 0.25%.

4. Payment Options

You may not be thinking of this feature while applying for a student loan, but whether you have multiple or limited options could influence what you do after leaving school or graduating. Student loans, whether federal or private, offer you the ability to pay the interest on the loans while you’re in school.

Like federal student loans, many private student loans offer a six-month grace period after graduation before you have to start to pay the lender back. Within that six-month grace period, you’ll need to secure a steady income that could be put towards what you owe. Students (as opposed to parents) need to be wary of loans that expect repayment to start within 30 to 60 days of receiving the loan.

5. Deferment

Federal student loans allow you to delay your loan payments while you are attending school. Some private student loans offer this, as well. Deferment for private student loans only applies to payments. Interest will still accrue on these loans. (With federal student loans, interest also accrues while you’re in school, except for subsidized Stafford undergraduate loans.)

There are lenders that offer other types of deferment. For example, some allow you to delay your payments because of financial hardship like unemployment or military deployment. Be mindful of the amount of interest you’ll owe and any fees the lender may charge for this. You’ll want to review this before applying for a loan.

6. Forbearance

Like deferment, you can suspend or reduce your payments for a certain period of time. With private student loans; lenders will use forbearance and deferment interchangeably. Regardless of whether the suspended payments are referred to as deferment or forbearance, the unpaid interest gets added to your principal, causing your monthly payments to increase and extending your loan term.

For federal student loans, there is a difference between forbearance and deferment. With federal loans, a deferment means you could suspend payments and you may not have to pay the interest on the deferred loans. Forbearance is similar except you’ll have to pay the accruing interest on all the loans in forbearance.

7. Fees

Just like you should read the fine print on a credit card, you should know about and understand what fees you might incur for private student loans. Some lenders will add your fees on to the principal of the loan. Find out answers to the following questions:

1. Is there a loan application fee?
2. Is there a loan origination fee?
3. What type of fees could I incur for making a late payment?
4. How do you pay the fees?
5. Perks

Private student loan lenders realize they are not the ideal option for a young college student or the student’s cosigners. As a result, they line their loans up with one or two perks to help you out in the long run. Banks have perks such as reductions in the principal balance or accrued interest for students who earn a 3.0 grade point average and above. Consider these perks as you decide on the best private student loan option for your specific circumstances.