5 Essential Things to Know About Private Student Loans
You knew college would be expensive, but maybe you didn’t realize it would cost quite this much.
If money in your college fund is coming up short, you may turn to private student loans to make up the difference. Many students do. In fact, per The Institute for College Access & Success, students took out $7.8 billion worth of private student loans in 2014-2015, up from $5.2 billion in 2010-2011.
But before you plunge into the private student loan pool, there are a few important things you should do. Here they are:
1. Make sure there’s no other source of funding first.
Before you even think about taking out a private student loan, make sure you’ve squeezed all the money out of your federal (public) student loans first.
Abril Hunt is a national trainings manager of outreach and financial literacy for Educational Credit Management Corporation (ECMC), a nonprofit corporation with a mission to help students succeed. As she puts it: “ALWAYS expend Federal Direct Student Loan eligibility before looking into a private education loan. Private student loans don’t have the same benefits as federal loans. They aren’t guaranteed by the United States Government. There are usually no cancellation options for death or disability.
“And unless you have rock star credit,” she warns, “your interest rate could be in the double digits.”
Therefore, a private student loan isn’t something to enter into on a whim.
Once you’ve ensured all your federal money is used up, “make sure you seek the advice of your school’s financial aid office before taking out a private loan,” Hunt adds.
Joe DePaulo, CEO and Co-Founder of College Ave Student Loans, agrees: “If your finances are coming up short to pay for the upcoming semester,” he says, “it’s never too late to contact your financial aid administrator about your personal circumstances. They may be able to help you find additional funding options to cover the gap.”
2. Ask questions. Then ask more questions.
If a private loan appears to be your best or only option, it pays (perhaps literally) to do your homework.
Private lenders have the ability to set varying interest rates and terms, so it’s essential you understand all the details of what a lender is offering before you take out the loan. The best way to do that? Research. Ask questions. Persist until you’re 100% crystal clear on what you’re agreeing to.
Hunt gives this advice: “Ask the lender what rate they base their interest on — U.S. Prime Rate or LiBOR — then make sure you understand the difference between the two. Is there a margin added to the rate? Is it Fixed or Adjustable? How often do they compound and capitalize interest?
Other questions she recommends you ask a lender:
- Is there a Loan Origination Fee?
- Are there interest rate reductions for ACH (automatic payments)?
- Are there any prepayment penalties?
- Are there charges or fees for changing due dates, or repayment plans.
Still stuck? “Search online for the terms you don’t understand,” Hunt suggests. “Better yet, make an appointment with your school’s financial aid counselor for a quick private loans 101 chat.”
“Sure, it can be overwhelming,” she says, “but putting your head in the sand only makes things worse.”
3. Have a (strong) cosigner on hand.
To get a truly good rate on a private student loan, Neil Sader, managing partner of The Sader Law Firm in Kansas City, recommends finding a cosigner. But that doesn’t mean just any adult willing to do you a favor. They need to have good credit.
“If you do need to consider private student loans,” he says, “applying with a cosigner with strong credit can help you get approved and may help you qualify for a better interest rate, which can mean a lower total cost of the loan.”
“But note,” he warns, “cosigners are equally obligated to pay back the loan.”
Robert Farrington, a student loan expert and founder of The College Investor, has additional advice for the cosigner: “Make sure that you get a loan with cosigner release so that your cosigner can get off the loan in the future.
Also, he warns, “many people don’t like to discuss death, but it does happen. The cosigner should get insurance on the borrower for the amount of the loan in case something happens.”
4. Borrow as little as you possibly can.
When it comes to loans, less is more.
Sader says that if a private loan is the only kind of loan available to you, keep this general advice in mind: “It is appropriate to borrow for tuition, books, school fees. Don’t borrow living expenses. Borrowing living expenses is usually when I find people run into problems.”
“You should really be considering the value of the degree you’re getting,” says Farrington, “what you expect to make after graduation, and can you service the loan payments and live. A small private loan might work for you to cover the gap you need to finish school, but you should be leery in funding your entire education via private loans.”
“A good rule of thumb,” he adds, “is never borrow more than you expect to make in your first year after graduation. If you want to be teacher, great! But you probably won’t make more than $45,000 per year early in your career, so you shouldn’t borrow more than that to fund your college education.”
Farrington stresses: “College is an investment — and you expect to get a return in terms of salary and career after graduation. If you borrow too much, you’ll have a negative ROI and you’ll struggle financially after graduation for years.”
5. Start making payments now, even if they’re not much.
Interest accumulation on private student loans typically starts right away, while you’re taking classes. That means that by the time you graduate, you’ll already owe thousands more than you borrowed.
To head that off at the pass, Brian Meiggs, founder of personal finance site MyMillennialGuide, suggests paying that interest while you’re still in school, if you can. “This will keep your principal balance level,” he says, “and when you graduate, you will only owe what you originally borrowed.”
By contributing, if not every month, then at least whenever you can, “you can help ease the burden you will inevitably feel once you are required to start paying off your student loans,” he says. “Make a small sacrifice now to help yourself out in a big way in the future.”
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