Student loans come in several shapes and sizes and will cover a range of school expenses, including room and board, school supplies, and even gas, food, and utilities (depending on the lender agreement). While federal student loans are the first option most students turn to for financial aid, private student loans are another feasible solution if you are seeking monetary assistance for your years of schooling.
If you’re looking for funding for higher education, it’s essential to know what private student loans are, how they can help you, who is eligible, and when you should consider this type of loan.
What is a Private Student Loan?
To begin with, let's get some definitions down, so we can differentiate between the 2 major groupings of student loans available. Federal student loans are regulated by the US government. As such, the loans have fixed interest rates, more flexible repayment schedules, and even a forgiveness option after a certain number of years (or payments) have passed.
Private student loans, on the other hand, are given out by private lenders. This can be a bank, independent lender, credit union, or some other agency. Since these loans are privately-funded, there are (almost) no regulations on them. The lender can charge as much or as little interest as they want, they can offer whatever repayment terms they’d like, and they can throw in any kind of extra tools or features they please.
When to Apply for a Private Student Loan
Generally speaking, even private lenders would recommend that you exhaust all of your federal loan options before looking into a private student loan. This is because it is easier to get approved for a government student loan, you’ll likely get better rates, and the terms are usually more appealing.
That being said, there are several private lenders today that are offering competitive rates, flexible repayment terms, and attractive additional services. So, it might be worth looking into both simultaneously to see which type of loan will give you the best combination of benefits overall. It is worth noting that if you take out a private student loan, you will not be eligible for student loan forgiveness programs in the future, whereas with a government loan you will. Student loan forgiveness is a financial aid program that assesses your financial situation, employment, and debt status to see whether or not part or the remainder of your student loan debt can be erased (i.e., you wouldn’t have to pay off the rest of the loan).
Private Student Loan Qualifications
Almost anyone who is an American citizen, has a valid Social Security number, and is enrolled in college can apply for a federal student loan with fairly high certainty that they'll be approved. This is not the situation with private student loans. While anyone can apply for a loan, you'll need to meet certain criteria in order to get approval for the loan.
Each private lender is allowed to set whatever eligibility requirements they want. Fortunately for borrowers, the requirements are usually pretty similar across the board. You can expect to be asked to have and prove the following qualifications at one point during your loan application process:
You must be a legal US citizen or permanent resident of the United States.
You must be of legal age. This can be a flat age of 18 years or older, or it can imply the legal age of the state in which you are living currently.
You must hold residence in a state in which the lender is legally authorized to distribute loans.
You have to be enrolled in an eligible college or institute.
You must also be enrolled in one of the eligible degree programs covered by the lender agreement.
Additional requirements may be required depending on the lender and the type of loan you are taking out. For example, if you are trying to get a graduate student loan, you may be required to provide proof of graduation, employment records, and pay stubs, or other loan information.
How to Apply for a Private Student Loan
One of the benefits of dealing with non-federal student loans is that you are dealing with private lenders, so it’s more of a business than government procedure. As such, you can actually get better terms due to the competitive nature of the market. Since lenders are competing for your business, they also try harder to please you (the customer is always right after all). One way this is done is by making the application process easy and fast.
You can apply for a private student loan with most lenders directly online. In fact, often the entire process can be done digitally, so you never have to go down to a stuffy office, stand in long lines, or listen to annoying sales pitches. These are just some of the benefits included in going with a private student loan.
While different lenders may vary slightly, here’s how a typical private student loan application process works:
Visit the website of the private lender you wish you apply with. There are several loan marketplaces which have networks of lenders under one umbrella. So, you can fill out a single application and have it sent to several lenders at once. This can save you a lot of time and annoyance.
Fill out the application form, attaching any documentation that is required of you (as mentioned above).
Next, the lender will have to verify your information with the school you have listed as your school of enrollment.
Once your application is sent in and information verified, the lender will contact you with potential loan offers. You can peruse these offers to see if the terms are agreeable.
If you like what you’ve been offered, you can agree to the terms.
The lender will get in touch with you to finalize the paperwork, have you e-sign the documents, and they’ll transfer the money directly into your account within a few days.
The whole process can take anywhere from 2-to-4 weeks depending on the lender and the amount of time your school takes to verify your information.
Tips for Improving Your Chances of Approval
Here are a few ways you can improve your chances of approval when applying for a private student loan:
Clean up your credit score
If you have outstanding debt, unpaid credit card bills, or errors on your credit report, do yourself a favor and clear those up before applying for a loan. Lenders look at several factors when considering your worthiness for their loans, and credit history can often play a big role in that decision. While it’s not always the case that credit history will determine approval, it always helps to have a clean bill of health on your credit report.
Bring a cosigner with you
Credit report not so great (or non-existent)? That’s ok. Most private lenders will allow (and some even prefer) you to bring a cosigner for your loan. The cosigner takes full responsibility for the repayment of your loan in the event that you are unable to pay back the amount for any reason. Lenders will often give borrowers a lower interest rate for including a cosigner on their application.
Have everything ready
Nobody wants to waste time unnecessarily. Have all of the documentation and information readily available, so you can easily scan and send in copies if asked for them. This will make the process smoother.
A Private Student Loan Can Help
Not having the money to pay for college shouldn't stop you from pursuing your dreams of getting a higher education. Private student loans are available to everyone, so research your options, and choose the best one for your unique circumstances.