Student Loans For Private Universities: What You Need To Know

Private student loans are offered by banks, credit unions, or online lenders, and they can be used to cover tuition, fees, and other expenses at colleges, universities, and trade schools. These loans are typically considered after students have exhausted their federal loan options and still need additional funding. Private student loans often require a creditworthy co-signer, such as a parent, and they may carry higher interest rates than federal loans. However, private loans can offer larger loan amounts, competitive interest rates for borrowers with good credit, and a streamlined application process. It's important to carefully consider the costs, eligibility requirements, and additional features when choosing a private student loan lender.

Private student loans: what they are and how they work

Private student loans are offered by third-party providers, such as banks, credit unions, state agencies, and schools. They can be used to pay for tuition and fees at two-year colleges, four-year institutions, trade schools, and other adult education centres, depending on the lender. Private student loans are typically used to finance college-level coursework and degree programs.

Private student loans offer several benefits, such as flexibility in loan amounts, competitive interest rates, and a streamlined application process. However, they also have some drawbacks, including the lack of federal protections, the potential for variable interest rates, and creditworthiness requirements.

When considering a private student loan, it is important to research lenders, understand the application process, and be aware of loan disbursement and repayment options. Private student loans should be used after federal student loans have been exhausted, as federal loans typically have more favourable terms and lower interest rates.

The application process for a private student loan usually involves checking with local banks, credit unions, and state-based agencies, as well as comparing loan offers from multiple lenders. It is important to provide the necessary documents, such as proof of citizenship, identity, income, and school information. Credit score and income are key considerations for most student loans, and a co-signer may be required for those with no income or bad credit.

Private student loans have flexible repayment options, with terms ranging from 5 to 20 years. They also have a grace period of six months after graduating, similar to federal student loans. Interest rates for private student loans can be fixed or variable, with variable rates starting lower but potentially increasing over time.

Overall, private student loans can be a good option for those who have already exhausted their federal loan options and need additional funding for their education. However, it is important to carefully consider the benefits and drawbacks before making a decision.

Private vs. federal student loans

Federal student loans are offered by the government, while private student loans are provided by banks, credit unions, and other financial institutions. Each has its own eligibility criteria, application process, and terms and conditions.

Application process:

Private student loans typically require applying directly with a bank or credit union, while federal student loans involve completing the Free Application for Federal Student Aid (FAFSA). Federal loans usually get processed faster than private loans, which require credit checks and lender approval.

Interest rates:

Federal student loans often have lower, fixed interest rates that stay the same for the loan duration. Private student loans may offer fixed or variable rates, with variable rates potentially increasing or decreasing over time.

Borrowing limits:

Federal student loans have set limits on borrowing amounts, which depend on factors like the year in school and dependency status. Private student loans can cover up to 100% of the total cost of attendance, minus other financial aid.

Repayment options:

Federal student loans offer income-driven repayment plans and allow borrowers to change their repayment plan after taking out the loan. Private student loans provide different repayment plans, including options for interest-only or fixed payments during school, potentially lowering the total loan cost.

Credit checks:

Federal student loans typically don't require credit checks, except for certain loan types like PLUS Loans. In contrast, private student loans depend on the borrower's credit score, and a cosigner may be needed for those with weak credit.

Fees:

Federal student loans charge upfront loan fees, while private student loans usually don't have origination fees.

Forgiveness and protections:

Federal student loans offer loan forgiveness programs like Public Service Loan Forgiveness and Teacher Loan Forgiveness. They also provide protections like discharge in the event of permanent disability or death. Private student loans generally lack these forgiveness and protection options.

Federal student loans are generally the preferred option due to their benefits and protections. However, private student loans can be considered if federal loans are insufficient to cover educational costs or if borrowers with strong credit seek lower interest rates. Ultimately, the decision depends on your financial situation, repayment options, and borrowing costs.

Benefits of private student loans

Private student loans can be a good option for students who have already completed the Free Application for Federal Student Aid (FAFSA) and still have a gap to cover in their finances. They can also be useful for those who have already borrowed the maximum amount in both subsidized and unsubsidized federal student loans. Here are some benefits of private student loans:

Rewards for excellent credit

Your credit score doesn't matter with most types of federal student loans as Congress sets the Federal Student Loan interest rates, and everyone receives the same rate. With private student loans, you can be rewarded with a lower interest rate if you or your cosigner has excellent credit.

Higher borrowing limits

Private student loans typically come with higher borrowing limits than federal loans. If you're attending an expensive school, your financial aid package might not cover all education-related expenses. With federal student loans, the aggregate limit as of Dec 7, 2022, was $31,000 for a dependent undergraduate or $57,500 for an independent undergraduate. For graduate student loans, the cap is $138,500. With private student loans, you can usually borrow up to 100% of your cost of attendance, minus any financial aid you've received.

Statute of limitations

When you default on a federal student loan, there is no statute of limitations, and you must eventually repay your loans. The government can garnish your wages and tax refunds. However, with private student loans, there is a statute of limitations when you default, which varies by state but can range from three to ten years. After this period, lenders have limited options to collect from you.

Quick application process

Private lenders often offer a much faster application process than FAFSA. You can generally apply online, upload requested income documentation, and get approved and funded within a few business days.

Options for international students

The U.S. Department of Education doesn't offer federal financial aid to most international students. However, some private lenders will lend to non-U.S. citizens, although a U.S. citizen will usually be required as a cosigner.

Alternative funding if you lose financial aid

You might qualify for private student loans even if you lose your eligibility for federal aid. Private lenders are unlikely to limit your funds due to a high income, and a high family income can help unlock more favorable interest rates and terms.

Drawbacks of private student loans

Private student loans can be a good option for those who have already completed the Free Application for Federal Student Aid (FAFSA) and borrowed the maximum in both subsidized and unsubsidized federal student loans. They can also be a good option for those with a co-signer who has solid credit. However, there are some drawbacks to private student loans.

• No access to income-driven repayment or forgiveness: Federal loans offer income-driven repayment plans that reduce payments based on the borrower's income, and some federal loans may be forgiven through Public Service Loan Forgiveness. Private lenders do not usually extend this generosity; the only way to lower monthly payments is through refinancing to a lower interest rate or longer repayment term.
• Interest rates are based on creditworthiness: Unless the borrower has excellent credit, they may end up with a much higher interest rate than they wanted. Private lenders offer a range of rates, and the lowest private student loan interest rates are generally variable, meaning they can increase over time.
• There's no federal subsidy: Undergraduate students with financial needs may qualify for subsidized federal student loans, where the federal government pays the interest while the student is in school. Private loans do not have this benefit.
• Usually cannot be discharged in bankruptcy: Private student loans generally cannot be discharged when a borrower files for bankruptcy.
• Deferment and forbearance are more limited: These options are standard for federal student loans but are not guaranteed with private student loans.
• Risks of overborrowing: Private student loans can provide access to a loan equivalent to the total cost of attendance, minus other financial aid. This higher loan amount can help cover expenses, but it also risks borrowing more than needed, leading to steep monthly loan payments and hefty accrued interest.
• Debt may persist after death: While federal student loans are typically discharged when the borrower dies, this is not always the case with private student loans. Some lenders may try to recoup the debt from the borrower's estate, negatively impacting any inheritance left to loved ones.
• Require good credit or a co-signer: If the borrower has insufficient or poor credit, they will likely need a co-signer with solid credit and stable employment to qualify for a private student loan.
• Limited repayment and forgiveness options: Private student loans may offer some flexible repayment options, but the choices are generally more limited than federal loans. Additionally, private lenders do not offer student loan forgiveness options.

When to consider a private student loan

Private student loans are a good option when you have already completed the Free Application for Federal Student Aid (FAFSA) and know that there is still a gap between what you’ve been given and what you can afford to pay. It is recommended that you first exhaust your federal loan options as they typically have lower interest rates.

You should consider a private student loan if you have already borrowed the maximum in both subsidized and unsubsidized federal student loans. Private student loans are also a good option if you or a co-signer have good credit. Many private student loan borrowers apply with a co-signer to improve their chances of qualifying and getting a better rate.

Private student loans are also a good option if you are an international student, as international students are not eligible for federal student loans or financial aid but can qualify for a private student loan.

Additionally, you should consider a private student loan if you are a parent seeking a loan for your child's education.

Frequently asked questions