Private student loans are always a sensitive issue. There is a camp of people who think private student loans are the worst tool and shouldn’t be borrowed to pay for college. Meanwhile, there are banks and refinancing companies that facilitate private student loans as a low-cost alternative to federal student loans.
As a parent or a potential borrower, which one? It’s a tough question, and there’s no right or wrong answer. Scratch it – there are some wrong answers and situations where private student loans don’t make sense. However, there are scenarios where private student loans make sense.
We break down everything you need to know about how private student loans work to pay for college. From how they work to what you need to know about repaying, we’ve got you covered .
Now is the time for all students and parents to fear. I have to write a college check. It is high. It cannot be denied. And when it comes to discussing how to pay for tuition, the question of private student loans inevitably comes up.
If you’re not sure where to start, federal or private loans, check out this guide to find the best student loan rates.
Private student loans are loans used to pay for education and related expenses. They are issued by banks, corporations, and credit unions, not governments. Private student loans are more like car loans and mortgages than any other type of debt.
It may sound shocking, but it makes sense when you think about it. If you take out a car loan and don’t pay it back, the bank will seize your car. If you buy a house with a mortgage and don’t pay it off, the bank will seize the house.
Well, private student loans are backed by your income – the collateral is what you make in the future. A college degree statistically increases your earning potential, so banks are happy to lend this money to colleges. will give you So you should be aware that if you fail to pay your private student loans, your lender can garnish your wages and more.
However, what makes student loans different from other types of debt is that unlike credit card or car loans, bankruptcy usually doesn’t get you discharged. A bankruptcy judge won’t wipe out your student loan debt as long as you have the potential to earn and pay it back.
Key terms and “must-know”
A private student loan is a loan and you owe this money and must pay it back. like that, Need to know exactly what type of contractHere are the key terms you need to look at when looking at private student loans.
interest rate: The interest rate is the rate at which interest accrues when you borrow. The lower the interest rate, the less “extra” payment to borrow this money. For example, if the interest rate is 1% and he borrows $1,000, he will pay $10 a year to borrow that money (this is an oversimplification, but it works). Interest rates are one of the important factors to consider when taking out student loans. Lowest interest rates are usually always the best loans.
semester: Term is the length of the loan. Many private loans have standard terms such as 10, 15 or 20 years. Different lenders offer different options. Along with the interest rate, the term actually determines how much you pay each month. The longer the loan term, the lower the monthly payments usually.
price: Some loans charge a fee for processing the loan. You really need to read this carefully – they may be called origination fees, processing fees, document fees, etc. Many of the best lenders do not charge a fee to obtain a private student loan. So if you see a fee, you probably want to run away.
Co-signer: Some private loans require a joint guarantor to get the best interest rates. The reason is that most lenders base their loans on traditional credit score models such as credit history and credit score. As a college-going person, you probably don’t have much of a credit history. The lender may ask someone to countersign the loan.Co-signed means that this person as responsible as you for debt repayment. If you don’t pay, the lender can ask the co-signer to pay.
So be really careful when getting a co-signer and realize that many people are hesitant to become a co-signer for this reason. Co-guarantors are allowed to be released after they have made a certain number of payments on time (usually three years or more).
Related: There are private student loans without cosignatories, but their offerings are limited.
Other Benefits of Private Student Loans
Many lenders offer two types of perks for student loans. Reimbursement benefits and other benefits are explained separately.
For repayment benefits, you can look for lenders that offer discounts for setting up automatic payments or paperless statements. Some lenders currently cut interest rates by around 0.25% just for setting up automatic payments. are doing
Some new lenders offer other perks, such as job assistance if you lose your job. These are just additional perks and should not be considered when deciding whether to get a private student loan.
How to qualify for private student loans
Now that you know the key terms and how private student loans work, you may be wondering how to qualify for a loan. Since private student loans are very similar to other types of loans, the eligibility process is similar.
All banks and lenders use different criteria, but most require borrowers to:
Credit score is important. A good credit score usually means easy access to private student loans. If your credit score is less than 700, you’ll run into problems. If your credit score is less than 650, you may be out of luck.
We recommend using Credit Karma as a free tool to check your credit score – go now.
A second factor closely related to your credit score is having a student loan guarantor. This is usually the parent, but can actually be anyone. I believe the majority of student loans are co-signed. Please remember that the guarantor is just as responsible for the loan as you are.
When to Consider Private Student Loans for College
Now that you know all about how private student loans work, you probably want to know if you should consider it.
A private loan can help you pay for school if you can’t afford it. But before you jump on the bandwagon, you need to do two things.
First, you should always do a return-on-investment calculation on whether college costs are worth it. It’s sad to think, but you are taking this education to increase your income. In addition, you will inevitably need this higher income to pay off your loan.
When doing math, I like to keep it simple – Find the career you want, research its starting salary, and don’t borrow more than the starting salary of the job you want.
For example, if you want to be a teacher, that’s great. But you shouldn’t borrow more than $35,000. Because that’s the average income of a teacher after graduation.
If you want to be an engineer, don’t borrow more than $64,000. Because this is the starting salary of an engineer today.
Second, you must first exhaust all federal borrowing options. Federal student loans are a great tool for paying for college. They usually offer better interest rates, repayment plans, and forgiveness options.
The definitive guide to student loan debt, breaking down the total amount you can borrow and the types of loans offered. Since this article is about private loans, we won’t delve too deeply into federal student loans. Keep in mind that you should get the most out of these first before you even consider private student loans.
Scenarios Where Private Student Loans Make Sense
With regards to when to consider a private student loan, we would like to share the most common scenarios when a private student loan makes sense.
Scenario for going to medical school. Earlier, we discussed student loan options for doctors, but let’s look at a private loan scenario.
Going to medical school is expensive. Doctors can expect her to spend over $180,000 on school. But doctors can still make a lot of money after graduation.
Take a look at our rules. The first rule is to consider salary after graduation. For a doctor, he can expect to earn over $200,000 after becoming a resident. That’s a great salary and means they can handle a large amount of student loan debt.
What about federal loans? Well, doctors definitely need to make the most of federal student loans. The problem is, federal loans allow you to borrow up to $20,500 a year.
In this scenario, private student loans make a lot of sense to bridge the gap between tuition and what federal loans cover. , there are also specialized moneylenders.
How to buy a private student loan
If you decide that a private student loan is right for you, it’s imperative that you shop around for the best loans.
Interest rates and duration should be your first and second priority when buying a loan.
When it comes to purchasing private student loans, we recommend two places to start. Check with your school’s financial aid office first. Some schools have preferred lenders that offer discounted rates and terms to students. This allows for significant savings.
Then take a look at our guide. Best Private Student Loans >>
You should also consider a comparison engine such as Credible. Credible buys multiple lenders in bulk at once and offers the best interest rates and fees for your situation. You can also use our student loan tool to compare all major student loan lenders.
The key here is shopping. Someone told you, don’t just take one loan. Find the best loan for you, as it can be difficult to change this later.
private student loan repayment
If you have private student loans, you need to figure out how to pay them back. We already covered the basics a while ago, but let’s take a look at what to do when it comes to paying off private student loans.
Unlike federal loans, you don’t have many options for repaying private loans. If you can’t afford to pay your private student loan, your only option is to refinance your loan for a longer term to pay less.
Some private lenders offer deferrals on a circumstantial basis, which is very rare for private student loans.
Conclusion
Private student loans should be considered like any other financial tool. They serve a purpose, but are often used in the wrong way.
So, if you’re considering a private student loan, make sure you’ve followed the steps above. Get a federal loan first, then a private loan. Always make sure you are shopping for the best interest rates and fees.
Remember, you can use services like Credible to compare and buy from many different lenders at once.
Do you have student loans? are you considering them?