And no finance-related topic has caused as much stress in my life so far as the process of securing a private student loan.
Entering my senior year at a private university, I’ve been fortunate enough not to need a private student loan — until now. Hopefully my experience can help you with yours.
The need for private loans: Cost minus federal aid and scholarships
Private student loans help you cover the gap between what federal loans and scholarships can pay, and the real cost of attending school (hint: it’s not just tuition).
Even after you know how much aid your university and federal loans can provide, you’ll still need another piece of important information: the school’s official “cost of attendance.”
That price tag should be listed on the university’s website (probably the financial aid section) and includes tuition, room and board, any automatically charged student fees (an athletic event or health fee, for example), transportation costs to and from school, books and supplies, and usually a “miscellaneous” category. This gives you a more accurate vision of what the overall cost of attending school for one year will be (rather than the much lower tuition number alone).
Subtract your financial aid, government loans, and scholarships from this number, and the result will be the amount you’ll need to pay for in other ways. Will you have income during school? Will your family help you cover this difference? If not, you may need to look at private loans to help cover the full amount of your education.
You’ll want to borrow as little as possible — since private loans are typically more expensive than federal loans — but you also want to make sure you don’t run out of money part-way through the school year and jeopardize the education you’re investing in.
OK, so now you know how much extra you’ll need. What’s next?
First, consider an option that’s actually just another, slightly different, federal loan. It’s called the federal parent PLUS loan program, and it allows your parents to borrow on your behalf. PLUS loans tend to have more favorable terms because, as the name suggests, a parent has to apply for it in his or her own name. That means your mom or dad must be willing and must have good credit.
If they’re willing but don’t have good credit, you may still be in luck. If your parents are denied the PLUS loan, this automatically makes you eligible for $4,000–$5,000 more in additional federal borrowing (thanks to reader Rob Sorbo for pointing this out).
After you’ve exhausted these federal options, it’s time to look at private loans. You can start with this helpful chart showing different loan options to get an overview of what rates to expect.
You can also try an online marketplace, like Credible.com (an affiliate of our site), to shop for private loans, or just quickly compare rates.
Here are some more factors to consider:
Can you sign alone?
One factor that will affect your options is whether or not you’ll be able to have a cosigner. If you can get a cosigner with a good credit score, you’ll have better private loan options.
Choose your rate: fixed or variable
Variable rates are tempting when they’re low, but remember you’ll be paying this loan for ten or more years, and rates can go up — a lot — during that time.
We went with a fixed rate.
Obviously we don’t know what will happen to interest rates without the help of a crystal ball, but if you can get a reasonably low fixed rate, it’s a reliable way to go.
Consider the repayment terms
When you’re choosing a loan, consider the repayment period and grace periods (how long you have to pay the loan back, and how long after graduation you have until they’re due). It’s tempting to pay back as soon as possible, but that’s not always realistic or smart.
Maybe you already have an investment banking job lined up after college and can pay them off super quickly with no problem. Great! If not, taking 10 to 15 years is probably a better idea. You can use a simple loan calculator like this one to see what your monthly payment would be over different periods of time.
You also want to avoid loans that charge a penalty for early repayment. What if you can comfortably pay back the loan in eight instead of 10 years? That should only be a good thing. You don’t want to pay a fee for doing that, and — believe it or not — several banks will try to hit you with one.
Avoid fees and seek out perks
Some banks charge an “origination fee,” an automatic charge for taking out the loan, usually presented as a percentage of what you’re borrowing. And it can really add up! One charged up to six percent for the origination fee; if you’re borrowing $25,000 for a year, the fee would be $1,500. Make sure you’re aware of any fees before you commit.
Other loans can offer nice perks. Some lenders will give you a reduced interest rate if you also open a bank account with them (I’m doing this at Sun Trust Bank). Some give you a little reward just for graduating. Some will let you start paying the interest off before you start paying the actual loan amount.
Now’s comes the “dating show” part of the process
I know, I hate those shows too.
But it’s the only analogy that comes to mind. In the show, the bachelor/bachelorette dates several individuals before deciding which he/she is going to choose. You’re going to do the same thing with the banks.
Until you get approved for a loan, you won’t know exactly how much it will cost. The bank has to first consider several factors (your cosigner, your credit score, and/or your application) before telling you for sure what your interest rate will be. When this happens, you want options. The bachelor who looked so good on paper might unexpectedly show you his disgusting Cheeto-strewn room on the second date. You never know.
So start by applying to several different loans. When the banks get back to you with their offers, you can be selective. Pick which one looks good and tell the others you’re no longer interested.
When you’ve made a decision, communicate with the lenders and your university, making sure all parties are aware of which loan you want to take.
As a final step, read the documentation that comes with your chosen loan carefully. You will have to sign a promissory note that is your commitment to repay the loan. This note will include detailed information about how much interest you’ll pay, when it begins accumulating, and what will happen if you don’t pay as agreed. Most banks (and colleges) are all too eager to rush students through this process, but being smart with money starts with understanding what you’re signing!
And … you’re done! Until you have to start paying the loan back, of course.
Was that so bad? It’s not light reading, but understanding your loan before you take it allows you to be in control of the process.
I hope this post will serve as a road map through the student loan application process. If I could add one last piece of advice: leave yourself enough time so that you don’t have to do this all in one sitting. Take your time to read about other people’s experiences, review literature, and act when you’re ready.
Find private loans with Credible
If you’re exploring ways to pay for school, our partner Credible provides a free, simple way to compare private student loan lenders and apply online. See the private student loan rates available to you here.
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