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When federal student loans aren't enough to cover your college expenses, private student loans can come to the rescue. Depending on your circumstances, they can be an excellent way to ensure that you have sufficient money to pay school and living costs while you're obtaining a higher education. Here's what to know to help you decide if private loans may be a good option for you.
Differences Between Federal and Private Student Loans
Although federal student loans and private student loans are for your education, they work in different ways.
The U.S. Department of Education issues direct loans, and the interest rates and terms are set by law. Qualification is not contingent on your credit history or credit scores. If you demonstrate economic need, you may receive a subsidized loan, which means the government will pay the interest on the loan while you are enrolled at least half-time in school, during a grace period or if you've deferred the loan. With an unsubsidized loan, interest will accrue during all periods. Federal student loans come with various repayment options, and interest rates are low and fixed.
Private student loans, on the other hand, are offered by financial institutions including banks, credit unions and lenders that specialize in student loans, such as SallieMae. Private lenders consider your creditworthiness when deciding whether to offer you a loan and what your interest rate and terms will be. These lenders determine their own interest rates, which may be fixed or variable, as well as repayment terms and other benefits.
Even if you can score a low-rate private student loan, tapping out what you can get from the government first is wise. Federal loans have undeniable benefits, such as long and flexible repayment periods, the ability to defer or forbear payments, and payment options that are based on your income and expenses.
Why Should You Consider a Private Student Loan?
There are two main reasons you may want to get a private student loan:
- Potentially more money available: Maybe you need to borrow more money than the federal government will lend you. A private student loan can fill in the gap, giving you the financial security required to continue your education.
- Great rates for good credit: If your credit history is attractive and credit scores are high, you may be able to qualify for a private student loan with a competitive interest rate. The average federal student loan interest rate for the 2020-2021 academic year is 2.75% for undergraduate loans and 4.30% for graduate loans. Private student loan interest rates vary by lender. Here are a few examples:
|Fixed APR Undergraduate||3.99% - 12.99%||4.23% - 11.76%||4.25% - 12.35%|
|Variable APR Undergraduate||1.24% - 11.98%||1.90% - 11.66%||1.25% - 11.15%|
|Fixed APR Graduate||4.39% - 11.98%||4.13% - 11.83%||4.75% - 12.11%|
|Variable APR Graduate||1.24% - 10.97%||1.80% - 11.73%||2.25% - 11.76%|
Note: All rates contingent on using autopay to make loan payments.
Another potential method to meet a college expense shortfall is with a personal loan. Private student loans are usually better for this purpose, however, because they typically offer significantly lower rates. APRs for personal loans range from about 6% to 36%, according to Experian data. Moreover, private student loans usually allow you to delay payments until you're finished with school (though you will accrue interest during that time); personal loans do not.
How to Start Your Search for a Private Student Loan
Terms, rates and features on private student loans differ by lender and by your credit standing. Before you start looking, check your credit reports and credit scores. If you have already developed a good credit history and a high credit score, you may easily qualify for a loan with great terms.
As a college student, however, you may be new to credit, which could make it more difficult to get a low interest rate on your own. In that case, consider asking someone who does have good credit (ideally a parent or close relative) to cosign the loan for you. If you find a cosigner, he or she will be liable for the debt if you fail to make your loan payments. This requires a great deal of trust, so if you do go this route, be certain that you can manage the payments long into the future.
Here are a few ways to start your search for a private loan:
- Scan sites that compare or review private student loans. Bankrate, Forbes and U.S. News are just a few of the media outlets that rank and review a wide variety of private student loans. Experian CreditMatch™ can help you see which student loans you may qualify for. In an easy-to read format, these sites list the lender, interest rate, credit score requirement, loan amount and other relevant details.
- Use a website that matches you to student loans. Experian CreditMatch™ allows you to view many offers all in one place.
- Check with your bank. Large and small banks often offer private student loans. If you've been with your bank for a number of years, ask what they have available for good customers.
- Become a credit union member. Credit unions are similar to banks, but are nonprofit financial institutions. As such, they may offer low-rate loans to members, even if you're just starting out. You can use Credit Union Student Choice to find a credit union in your area that offers private student loans.
After researching several private student loans, identify the one that matches your credit rating (or that of the cosigner) and has these desired qualities:
- Lowest interest rate: The interest rate you get will have a strong impact on the total interest you end up paying.
Here's an example of the difference you could pay on a $10,000 loan with a five-year term depending on your rate:
3% interest rate: $179.69 monthly payments; $781.21 total interest paid
12% interest rate: $222.44 monthly payments; $3,346.67 total interest paid
- Reasonable repayment term: All loans come with a set repayment term. For example, College Ave loans offer terms of five, eight, 10 and 15 years. The shorter the term, the higher the payment—but the less you'll pay in interest. Conversely, the longer the term, the lower the payment and the more you'll pay in interest.
Here's an example of the difference you could pay on a $10,000 loan with a 6% interest rate depending on your term length:
Five-year term: $193.33 monthly payments; $1,599.68 total interest paid
15-year term: $75.82 monthly payments; $6,376.31 total interest paid
- Compelling perks: Because the private student loan market is highly competitive, some lenders offer perks to entice borrowers. For example, a lender may give cash reward incentives for good grades, or an interest rate discount if you sign up for automatic payments or if you make interest-only payments while you're enrolled in school and during the grace period.
What to Do When Private Student Loans Aren't an Option
If your credit rating disqualifies you for a private student loan (or the terms are unattractive) and you already have federal student loans, consider other ways to manage your finances so you can stay in school.
- Grants and scholarships: When you filled out your Free Application for Federal Student Aid (FAFSA), you would have learned if you were eligible for any federal grants, but other grants exist. Since you don't have to repay them, they're worth exploring. Check out your state grant agency for state grants, as well as those that might be awarded by your specific school, are gender-based, are for underrepresented students or are earmarked for certain graduate programs. Scholarships, too, may be available. Your school's financial aid office should be able to help you determine what might be available, but you can also use the U.S. Department of Labor's scholarship search tool.
- Help from your financial aid office: Contact your school's financial aid office for assistance. They may be able to provide you with an emergency loan, connect you with a work-study program or restructure your financial aid award so you receive more money.
- Part-time job: Sometimes extra income is the solution, so consider getting a part-time job to help you make ends meet without having to borrow. Or trim unnecessary expenses so you have enough money to live on and pay for your education.
- Loan from family: Another option is to ask a relative for an interest-free or low-interest loan that you can repay when you're finished with school and have a full-time job. Make sure you make the agreement official, with terms spelled out.
Let Your Credit Help You
During this time you can improve your credit reports and scores by paying all your credit accounts on time and driving down revolving debt such as credit card balances. Consider free credit monitoring from Experian to track your progress.
Doing your research and being prepared to apply for loans or take other necessary steps will help you get the funds you need to achieve your college degree—and help put you on a path toward future success.