- Don’t apply for private student loans until you’ve exhausted all other options, including grants, scholarships, federal loans, personal funds, and family members.
- The best private student loans are those with the lowest total cost of borrowing and a payment plan that you can manage once you graduate.
- Only take out a loan for as much as you’ll need, and consider the total cost of attendance (not just the tuition) of a public vs. private university.
It’s no secret that college is expensive. Student loans are the largest group of any non-housing debt in the United States. Still, you know there’s value in school, and you feel the need to take out the necessary loans to get there. College graduates can make $1 million more over their lifetime on average than their counterparts who didn’t attend college, after all.
If you haven’t looked into federal student loans yet, read up on them first. They typically have lower interest rates than private loans, less fees, and are more manageable in general. If you’ve already tried your hand at federal loans and you absolutely can’t get any of them or they don’t cover all your expenses, securing the best private student loans can be next on your financial checklist.
Even though college can result in more earning power, it’s important to understand what goes into loans, and more importantly, how to avoid the ones that will burden you for a long time.
What Makes the Best Private Student Loans?
Like traditional loans, student loans come in numerous types. There are federal loans offered by the government, private loans offered by banks and other lenders, and loans that fall somewhere in between. But not all loans are created equal.
So what can make the best private student loans, well, the best for you? Several things:
- A rate that matches your needs: The best loan for you is one that’s affordable, or at the very least, doable. You may have a choice between fixed and variable interest rates on private student loans. With a fixed rate that won’t increase, your loan payments at the end of the term will be predictable each month, and that could be a good thing. Variable rate loans can change over time but will typically start off with lower rates than fixed, and that could be a benefit since the interest charges start as soon as you get the loan. Variable rate loans might work best if you believe you can pay off your loan quickly once you graduate.
- You qualify: You want a loan you’ll qualify for. Just like federal student loans have requirements, private lenders also have various criteria that need to be met, e.g. many lenders only lend for undergraduate degrees. Don’t waste your time on loans that you have no chance of getting.
- They’re not too big: Some private student loan lenders will be eager to offer you more than you need. Do the math and determine how much you’ll need to cover the cost of your degree for however many years it will take.
- Payments are manageable: Loan payments can fluctuate depending on the total cost, whether or not it’s a variable rate loan, if it has interest rate reduction built in, and so on. Ask to see how much your monthly payments should be.
- The lender is reputable: Before you even enter the application process with a lender, make sure they’re reputable. Do a search of the lender online and see what others have to say.
No two people are the same, so what makes the best student loan for one person may not make it the best for you. Consider the above criteria carefully before you sign up for any student loan debt.
When Should You Use a Private Student Loan?
If you can’t afford college on your own or with the help of family members, it might be time to consider financial aid. Before you rush into securing the best private student loans, you’ll want to check out federal loans first.
Fill out a FAFSA form and see if you qualify for anything. It’s possible you’re eligible for grants that you don’t have to pay back. Otherwise, you may qualify for federal loans. These generally have lower interest rates, more lenient terms, and more flexible repayment options including loan forgiveness if you work in the public sector. Even better, many federal loans are subsidized and don’t accrue any interest until you graduate or leave college. If you’ve tried your hand with federal aid, it’s time to look to the best private student loans.
How to Secure the Best Private Student Loans
It’s one thing to do a search online and find a great student loan, but it’s another entirely to actually secure one. These tips will help you vet loans and be more prepared when applying for the best private student loans for you.
1. Determine Your Financial Need
Before you begin applying for any loans, assess your financial needs. You don’t want to take out more than you need, especially with student loan interest rates climbing steadily year-over-year. A larger loan than you need could cost you thousands in interest.
2. Estimate What You Can Pay
With your total amount needed in mind, estimate what you can realistically expect to pay. Many loans don’t require payment while you’re in school, so estimate conservatively by using a lower income as your frame of reference.
Ideally you’ll make more money when you graduate than you do at your college job (if you have one). Research the potential jobs for your chosen field and in the town or city you plan to live after you graduate. Then, save every penny you can in preparation for the moment it’s time to start repaying.
3. Begin Your Search
You’ll discover student loans almost immediately when searching online and locally. If you find anything promising, look to see if they offer a rate discount, and that they’re they’re fair and honest with rates or fees.
Do you or your family already have a relationship with a local bank? Perhaps you’ve been loyal to this bank for years and even got your first checking account or auto loan there. Relationships matter in the banking world, too, so start with your neighborhood branch to see if they can help you.
4. Ensure Your Credit History Looks Good
Your education might be the most costly investment you make, so it pays to go into your debt obligations armed with the highest credit score you can achieve. Borrowers with the best credit history are rewarded by private lenders with the best rates. It can take months to improve your credit score, so plan on checking your credit history well in advance of applying for student loans. Even someone just out of high school with a part-time job and no credit can build a stellar credit history.
Balancing Your Future and Your Finances
Whether you’ve already started applying for loans or you’re just beginning your journey, it’s important to have a realistic view of where you want to go to school and what you want to study.
Generally speaking, public university is going to be more affordable than a private college. If you have your heart set on a private school, look at their tuition rates and available financial aid, specifically for the program you’re interested in, and map out how much it will cost for four years.
Before You Agree to a Loan
It’s nearly impossible to calculate your college cost down to the dollar, but you’ll get pretty close if you can be as specific as possible in your planning. To help you map out your college costs and career future, use these tips and guidelines:
- Be Mindful of Cost of Living: It’s easy to fall in love with a college and forget the cost of living that surrounds it. One university might be more affordable than another on your list, but make sure to look into the cost of living for that town or city as well. It could end up being cheaper to go to the more expensive university in the more affordable town.
- Focus on Major: Prestigious universities carry some clout, but studies have shown that your major matters more than your university in many cases. Don’t go to a university if they don’t have the major you want.
- Investigate Career Options: Look into numerous career options and see what the market looks like for your potential profession.
- Consider Community College: Community college can be a great way to knock out your required general education credits like math, science, and history. It can be much more affordable to get your basics done at community college and then transfer to a four-year college.
Key Loan Terms to Know
To make sure you’re well aware of what lenders are saying and what you’re agreeing to, study the below terms and know them well while you apply for the best private student loans.
The interest rate is the amount you’ll be charged every day or month over the life of the loan, including any interest that’s built up (the effect of compounding). Keep in mind that your interest amount every month should decrease as the amount of the loan goes down, and more of your monthly payment will go towards paying off the loan itself.
Loans can come with a whole plethora of fees. There can be application fees for even applying, fees for paying early, fees for paying late, and so on. Ask about any and all fees when looking at your student loan options.
The repayment terms are simply a breakdown of how you agree to repay the loan. Are you taking a certain amount out over 10 years? Or that same amount over 20? What’s the interest rate? When are payments due and are there late fees? These are all part of the repayment terms.
Some loans will come with a prepayment penalty. This is a penalty for paying off the loan early. If your loan has one, talk to a financial adviser about whether it’s better to pay the fee or pay the loan off when it was originally due.
Forbearance or Deferment
Loan deferment or forbearance is the process of stopping loan payments for a temporary period. Automatic payments will halt if you have them, and in short, no payments will be due. The loan will still gain interest, which can be especially damaging if the annual percentage rate or interest is set to increase. Allowing your loan to gain more interest without making payments can also slow you down on your journey to good credit.
The loan limits are the total cap of your loans. This isn’t the same as an individual loan amount, but it’s your overall loan limit and how much you can have at once from both private and federal loans.
A cosigner is someone who signs for a loan with you and takes on the financial burden in the event you default or can’t pay. This means their credit and bank account is on the line, so if you have a cosigner make sure it’s someone you know and trust, and someone that knows and trusts you.
The grace period is an amount of time after graduation during which you don’t have to make payment. Not all loans have this, but if you can find one with this that isn’t also accruing interest during that period, it’s a huge perk.
Loan forgiveness is the act of having some or all of your loans forgiven so that you don’t have to repay them anymore. Note that student loans cannot be discharged even in cases of bankruptcy, so this debt obligation is very serious indeed. Forgiveness programs are rare and selective about who can have loans forgiven, and can come with tax consequences, so don’t bank on this.
Other Resources to Check First
You’re now armed with the information you need to apply for the best private student loans. Before you start signing up for any loans, there are some things you should consider first to prevent any unnecessary debt:
- Grants: Before you apply for any loans, look into grants. There are a number of resources that can help you in your search, and the time investment is absolutely worth it. Grants don’t require any payment on your end, and even several small grants can add up to a nice sum that puts a dent in your tuition.
- Scholarships: While generally more competitive than grants, scholarships shouldn’t be written off. Do your homework and see if there are any local, state, or national scholarships you might be a good fit for. Like grants, scholarships can take some time and energy, but they require no repayment and are worth every second.
- Personal Funds: Check to see if anyone in your family can support you. It can be surprising how willing family members are when it comes to helping someone pursue higher education. Also, it’s never too late to start saving some of your own money now in preparation for college.
- Employer Reimbursement: Some employers will offer a reimbursement program for employees attending college or taking classes that relate to their job. Ask if your employer offers this, as this can be a huge help. Not only this, you may have a 401k account that’s receiving a match from your employer, meaning your retirement fund is growing while your education is also paid for. Win-win!
- Federal Loans: Again, federal loans are often a better all-around deal than private loans. FAFSA applications can take some time, but you could wind up with a loan that has low interest rates, requires no payment until months after graduation, and less fees than a private loan.
Hunting for the best private student loans is an in-depth process. By following the tips in this guide you can confidently and smoothly work your way through these major life decisions.
Read the fine print, even the boring stuff, on any loan before agreeing. Ask a financial advisor or someone you trust for advice on the loan terms and cost of borrowing before signing, and don’t let a lender talk you into more money than you need.
Finding the right loan can take time, but it’s time well spent and there’s an end to your search in sight. Before you know it, you’ll be moving that tassel from one side to the next and embarking on your next great journey: a career.