When it comes to paying for college, there are various ways to help you pay for college, such as grants, scholarships, savings and federal student loans. If these don’t cover the full cost of college, one option to cover the gap is with private student loans. But what are they? And how do they work?
5 Facts About How Private Student Loans Work
1. They provide gap funding for college.
Before taking out private student loans, you should first look into federal student loans in the student’s name. They have a low fixed interest rate, but they also limit how much money you can take out each year. Suppose you’ve maxed out what you’re able to borrow in federal student loans. In that case, private student loans work by covering that financing gap.
2. Private student loans usually require a cosigner for undergraduates.
Private student loans are issued by private banks or financial institutions and require a credit and income check to determine the borrower’s ability to pay back the loan. College students often have not established much credit history, so they need a parent or guardian to cosign on the loan. Here are a few tips for how to find a cosigner.
3. Interest rate is determined by the lender and your credit qualifications.
Each private student loan provider sets its own interest rates. Private student loan interest rates are determined by each applicant’s creditworthiness and ability to pay back debt. Applicants are also typically able to choose between fixed vs. variable interest rates.
4. Repayment plans vary.
Federal student loans have repayment plans set by the government, and the standard repayment plan is to pay back those loans within 10 years of graduating. Private student loans may offer a variety of flexible repayment plans depending on the lender. College Ave, for example, has repayment plans ranging from 5 years to 15 years and whether to make payments while the student is in school or wait until after graduation.
5. Loan forgiveness programs don’t exist.
Private student loans don’t have forgiveness programs that help you eliminate your student debt after working for a specific time frame. Federal student loans have some forgiveness programs, but you have to work in the public sector for several years before becoming eligible for those programs.
Choosing a Private Student Loan
Before securing a private student loan to help pay for college, here are a few tips:
- Research. Research private student loan lenders first. You’ll want to choose one that has a repayment program that works for you and your family.
- Apply. You will need a few things handy to apply, such as your contact information, social security number, the school you’ll be attending and how much you need to borrow. You’ll also need your cosigner’s information to complete the application.
- Shop for rates. To compare lenders’ rates, you’ll likely have to apply to multiple lenders to shop for the best rates.
- Accept & sign the loan terms. After selecting which private student loan is best for you, you’ll need to accept and sign the loan terms.
After you complete the above, your loan provider will make sure your loan is certified by your school before sending the funds to the school. Then you’re all set and ready to start classes!
Student loans may be necessary to pay for college. Private student loans can help, but what are they, and how do they work?