{"id":29519,"date":"2019-02-08T12:46:42","date_gmt":"2019-02-08T17:46:42","guid":{"rendered":"https:\/\/www.tun.com\/blog\/?p=29519"},"modified":"2025-08-05T14:09:10","modified_gmt":"2025-08-05T18:09:10","slug":"are-private-student-loans-right-for-you","status":"publish","type":"post","link":"https:\/\/www.tun.com\/blog\/are-private-student-loans-right-for-you\/","title":{"rendered":"Are Private Student Loans Right for You?"},"content":{"rendered":"\n

College education in the United States is getting more and more expensive, and students are borrowing more than ever to pay for their education. <\/span><\/p>\n\n\n\n

Student debt has reached a high of <\/span>$1.6 trillion<\/span><\/a>, with the average undergrad borrowing about <\/span>$30,000<\/span><\/a>. Unfortunately, most students do not know how to manage their student debt successfully because they <\/span>haven\u2019t been given adequate financial education<\/span><\/a> to help them do so.<\/span><\/p>\n\n\n\n

So, if you need to borrow money for school (like I did), be smart about it. <\/span><\/p>\n\n\n\n

First, explore all the options available to you — grants<\/a>, scholarships<\/a>, federal student loans<\/a> and  work-study programs<\/a> available at your school — and take advantage of free money and loans bearing lower interest (in that order). You need to complete the FAFSA<\/a> (Federal Application for Federal Student Aid), so colleges can use the data to assess your financial need. <\/span><\/p>\n\n\n\n

For extra spending money, consider <\/span>part-time jobs<\/i><\/b> that will accommodate your school commitments. <\/span><\/p>\n\n\n\n

Next, if these sources are not enough and you still need to take out private student loans, learn all about it before you decide that you want to carry more student loan debt. And <\/span>only borrow what you need for your education<\/span><\/i><\/span>.<\/span><\/i> Don\u2019t take on more debt just to finance a lifestyle.<\/span><\/p>\n\n\n\n

Here\u2019s what you need to know before you make your decision:<\/span><\/p>\n\n\n\n

1. What are private student loans?<\/b><\/h2>\n\n\n\n

Unlike federal student loans, which are issued and guaranteed by the U.S. Department of Education and managed by an assigned loan servicer, <\/span>private student loans are issued by private lenders — banks, credit unions and investors who provide funding to online lenders — and are not guaranteed by the federal government.<\/span><\/p>\n\n\n\n

Like federal student loans, private student loans must be used for educational purposes, such as tuition, room and board, fees, books, computers and electronics for school, supplies and equipment, transportation, and personal needs at school. <\/span><\/p>\n\n\n\n

2. What types of interest rates do private student loans offer?<\/b><\/h2>\n\n\n\n

Most private lenders offer borrowers a choice of <\/span>fixed<\/span><\/i><\/span> or <\/span><\/i>variable<\/span><\/i><\/span> APR (annual percentage rate). <\/span><\/p>\n\n\n\n

When the interest rate is <\/span>fixed<\/i><\/b>, the rate doesn\u2019t change, so your monthly payments will always be the same amount. Knowing how much you need to pay each month will help you with your budget.<\/span><\/p>\n\n\n\n

When the interest rate is <\/span>variable<\/i><\/b>, however, your monthly payments will vary because the interest rate is tied to the market and can <\/span>go up<\/span> or down. Because of the potential for the interest rate to go up, it <\/span>could be risky<\/span><\/i> to choose variable APR.<\/span><\/p>\n\n\n\n

3. How are interest rates on private student loans determined?<\/b><\/h2>\n\n\n\n

Generally, the interest rates on private loans are based on the strength of your credit score or history, so a <\/span>credit check is required<\/span>. The better your credit score or history, the lower the risk you pose to lenders and the more advantageous the rate you get.<\/span><\/p>\n\n\n\n

In contrast, the interest rates on federal student loans generally are not<\/em> contingent on your credit score or history. Borrowers of the same type of federal student loans get the same interest rate. Keep in mind, however, that federal Grad PLUS<\/b><\/a> (for graduate and professional students) and Parent PLUS<\/b><\/a> loans (for parents of dependent undergraduate students) do require a credit check. <\/span><\/p>\n\n\n\n

Also, interest for private student loans accrues while borrowers are still in school. In contrast, the federal government pays the interest on <\/span>subsidized<\/i><\/b> federal loans while a student is still enrolled in school, in deferment, or under a \u201cgrace period.\u201d Interest on <\/span>unsubsidized<\/i><\/b> federal loans, however, accrues while students are still enrolled.<\/span><\/p>\n\n\n\n

Most private lenders offer students the option to defer payments while they\u2019re still enrolled in school. But, if you can afford it, you should <\/span>make in-school payments<\/span> to lower your total repayment costs. <\/span><\/p>\n\n\n\n

4. Why is creditworthiness important? <\/b><\/h2>\n\n\n\n

As mentioned above, a credit check is required for private student loans and federal Direct Plus loans. When your credit is pulled, banks and institutions can see your credit history and your credit score.<\/span><\/p>\n\n\n\n

Your <\/span>credit history<\/b> is, essentially, your financial record showing how you handled payments of debt. It takes time to build a solid credit history, so you should start, if you haven\u2019t already.<\/span><\/p>\n\n\n\n

A <\/span>credit score<\/b> is a three-digit number — ranging from 300 to 850 — that banks and institutions use to determine how financially responsible you are and whether to issue you a loan or credit card. Below is a chart that shows what affects your credit score.<\/span><\/p>\n\n\n\n

A higher score not only improves the odds of having your application approved, but also makes you eligible for lower interest rates. A lower score, on the other hand, reduces your chances of getting a loan and translates into higher interest rates.<\/span><\/p>\n\n\n\n

Generally, a credit score of 750 and above is considered excellent, and 700 and above is considered good. Below is a chart of the various categories of credit score.<\/span><\/p>\n\n\n\n

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If you don\u2019t know your credit score, you can check for free with <\/span>Credit Karma<\/span><\/a> or <\/span>Credit Sesame<\/span><\/a>. It\u2019s important that you do this ahead of time, so you can fix any issues that may pop up on your credit report. And be wary of offers to help you with credit problems; use these tips<\/a> <\/span>instead to repair your credit yourself. <\/span><\/p>\n\n\n\n

5. Do you need a cosigner?<\/b><\/h2>\n\n\n\n

As mentioned above, it takes time to establish a credit history. Unfortunately, most students haven\u2019t had time to build one when they first enter college. That, coupled with a lack of income, means that it is difficult for most students to get a private student loan on their own. <\/span><\/p>\n\n\n\n

But don\u2019t worry if you are in that position. In most cases, you can still get a loan if you can find someone – usually, it\u2019s a family member — to apply for a loan with you and agree to pay off the debt if you don\u2019t make payments when they\u2019re due. Ideally, your cosigner is someone with a strong credit, which will make your application more attractive to private lenders and potentially lower your interest rate. <\/span><\/p>\n\n\n\n

Whoever cosigns your loan is taking a huge risk on your behalf, so act responsibly. Make your payments on time, so you don\u2019t damage your cosigner\u2019s credit. Keep in mind also that your <\/span>cosigner is on the hook if you stop making payments, and that, by cosigning your loan, your cosigner may find it difficult to get a loan if he or she should need it. <\/span><\/p>\n\n\n\n

Cosigners are responsible for the life of the loan, but you should find out from your lender the circumstances under which you can release your cosigner from your loan and work towards that goal.<\/span><\/p>\n\n\n\n

6. What are the repayment terms?<\/b><\/h2>\n\n\n\n

While the <\/span>standard repayment term for federal student loans<\/span><\/a> is 10 years, private lenders typically offer a range of repayment terms. <\/span><\/p>\n\n\n\n

Private lenders offer loans from 5 to 20 years. The graphic below shows some examples of what\u2019s being offered.<\/span><\/p>\n\n\n\n

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Unlike federal student loans, which let you choose your repayment term after you graduate (or leave school), private student loans require that you choose before receiving your loan. <\/span><\/p>\n\n\n\n

By choosing a shorter term loan, you are more likely to get a lower interest rate. You will pay off your loan faster and pay less in interest. But, you will have larger monthly payments. <\/span><\/p>\n\n\n\n

The reverse is true of longer term loans. <\/span><\/p>\n\n\n\n

Your actual repayment terms and the interest rate will depend on your creditworthiness and that of your cosigner, if you have one.<\/span><\/p>\n\n\n\n

7. How much can you borrow?<\/b><\/h2>\n\n\n\n

Since private student loans are meant to be used only for educational purposes, the maximum loan amount for an academic year is determined by the costs of your school, minus federal student loans, grants, scholarships, or other financial aid you get. <\/span><\/p>\n\n\n\n

Your ability to pay back the loan will also be a factor in determining how much you can borrow.<\/span><\/p>\n\n\n\n

Most lenders also set a limit on how much you can borrow. For exampl<\/span>e, Citizens Bank<\/span><\/a> has a maximum <\/span>loan amount of $225,000, or total cost of education, whichever is lower, for undergraduate and graduate degrees. For MBA and law degrees, the maximum loan amount if $300,000. For healthcare, the  maximum is $225,000 or $400,000 depending on your degree. <\/p>\n\n\n\n

Your goal, however, is to borrow as little as possible, so you graduate with the least amount of debt. This is particularly important for undergraduate students who intend to pursue a higher degree in law, medicine or business, and have to borrow then. You don\u2019t want to add debt on top of debt.  <\/span><\/p>\n\n\n\n

8. What is the right private student loan for you?<\/b><\/h2>\n\n\n\n

There\u2019s no magic answer. You need to put in the time to research and compare what different lenders offer to someone in your particular situation. <\/span><\/p>\n\n\n\n

Check each lender\u2019s terms carefully and compare them against others.<\/span> An organized way of accomplishing this is to create a spreadsheet, listing the amount you\u2019re considering borrowing and what each lender is offering you in terms of fixed and variable interest rates, repayment terms, repayment options, fees (application, origination or prepayment), total repayment costs, cosigner release options, rate reductions for automatic payments, special rewards etc. <\/span><\/p>\n\n\n\n

Check with your school for recommendations on private lenders.<\/span><\/p>\n\n\n\n

If your school doesn\u2019t work with a particular lender, start your research with some of these banks — Citizens Bank<\/a>, CollegeAve<\/a>, EDvestinU<\/a>, and Sallie Mae<\/a> — to get an idea of what some better known lenders offer.<\/span><\/p>\n\n\n\n

9. What are the disadvantages of private student loans?<\/b><\/h2>\n\n\n\n

Private student loans fill the gap between the financial aid you get and the costs of education. <\/span><\/p>\n\n\n\n

But, private student loans don\u2019t carry the benefits that come with federal student loans, such as the <\/span>Public Service Loan Forgiveness (PSLF)<\/span><\/a> and the <\/span>Teacher Education Assistance for College and Higher Education (TEACH) Grant<\/span><\/a>.<\/span><\/p>\n\n\n\n

In addition, if borrowers have problems making their monthly payments on their federal student loans<\/a><\/span>, they have the option to apply for deferment or forbearance, or to have their monthly payment adjusted based on their discretionary income (income-driven repayment plans). <\/span><\/p>\n\n\n\n

Some private lenders will help borrowers temporarily manage your loan payments if they\u2019re having payment problems. For example, <\/span>EdvestinU<\/a> borrowers may postpone payments with an in-school deferment while the student is enrolled at least half-time. Borrowers may also postpone payments during the repayment period by entering a hardship forbearance for up to 24 months. <\/p>\n\n\n\n

If you are experiencing trouble making payments on your private student loans, you should immediately contact your lender to discuss your options.<\/p>\n\n\n\n

The bottom line<\/b><\/h2>\n\n\n\n

Try not to take on more student debt, if possible. But, if you have determined, after thorough research, that you absolutely need private student loans to fund your education, make sure you choose the right loan with the right lender. Then, once you\u2019ve borrowed the loan, act responsibly and make sure that you do not run afoul of the terms of the loans — that includes being enrolled at least part-time to qualify for loans each academic year.<\/span><\/p>\n\n\n\n

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[adthrive-in-post-video-player video-id=”jedcV8IP” upload-date=”2023-11-01T20:41:56.000Z” name=”How Do Student Loans Work?” description=”TUN sits down with Holly Morrow, the senior vice president of knowledge at uAspire, to discuss how student loans work.” player-type=”static”]<\/p>\n\n\n\n

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