How to choose a private student loan for college

Private student loans are necessary for many people pursuing a trade school or higher education. Lenders offering private loans for college have varying loan terms and interest rates. Comparing these differences helps you secure the best deal.

Borrowers will want to look at factors like eligibility requirements, repayment options, fees, interest rates (whether fixed or variable) and product details. After comparing the options, applicants can complete an application with the company of their choice. This application is separate from their FAFSA (federal loan application).

How to choose a student loan

When shopping for private student loans, it’s important to consider more than just interest rates. Ensure the loans meet your needs by reviewing fees and repayment terms. Eligibility requirements and the types of loans offered are also key considerations.

1. Review product details

Different loans are tailored for different types of students. Beyond just undergraduate or graduate loans, lenders may offer special rates and terms for business, medical, dental and law school. There are even loans designed to fund bar exam preparation.

Some lenders also offer loans to students attending trade school or community college.

While reviewing the lender’s products, check the loan limits and the repayment term length. Ensure you can borrow the amount you need and that the loan comes with flexible terms.

2. Compare interest rates

The interest rate you pay — and whether it’s fixed or variable — impacts how quickly your balance grows and how much you pay overall. Lenders disclose their interest rate ranges. However, the exact rate you’re offered depends on your credit score and other financial details.

Some lenders offer prequalification, which allows you to check your interest rate and loan terms without hurting your credit. It’s worth getting a prequalification offer when available so you can calculate the cost of borrowing and compare offers.

Some lenders also offer a choice between fixed and variable rates. A fixed-rate loan may start a bit higher, but it remains constant throughout the loan term. That makes future payments easy to predict.

Variable rates change over time based on market forces. This may increase your loan costs.

Also, look for interest capitalization, which occurs when the lender adds unpaid interest to the principal of your student loan. As a result, the loan balance grows faster.

3. Check for fees

Fees increase your total borrowing cost, so ask the lender for a copy of the fee schedule and check whether any apply to you. Some lenders charge zero fees — but that might be less of a perk if your rate is higher. Others base fees fees on your creditworthiness. Look for these types of fees:

• Application fee: Some private lenders charge a nonrefundable fee to process your application.
• Origination fee: Origination fees are usually calculated as a percentage of your loan amount and come from the loan proceeds. This means you won’t get the full loan amount. For instance, with an origination fee of 5 percent on a $10,000 loan, you’d receive $9,500. The remaining $500 goes toward the fee.
• Late fee: The lender may charge a late fee if you miss a monthly payment or submit it late. These are usually a percentage of the amount due, with a cap on the amount.

However, you won’t have to worry about prepayment penalties on any student loan. Lenders aren’t allowed to charge borrowers a fee when they pay off their student debt early.

4. Make sure you qualify

Before applying for a private student loan, make sure that you’re likely to qualify to avoid multiple hard checks on your credit. Every lender sets eligibility requirements, but most usually look for:

• Credit history: Your credit score and the information in your credit reports can determine your eligibility for a private student loan and the interest rate you receive. If you’re new to credit or have poor credit, the lender may require a creditworthy co-signer. A co-signer is typically a trusted friend or relative. That person agrees to make payments if you cannot, so you’re both equally responsible for the debt.
• Income: You’ll also need to show that you have the income to repay the loan or a co-signer who does. The lender may also calculate your debt-to-income ratio to check how much of your income goes toward monthly debt payments.
• Enrollment status: Lenders will check that you’re attending an accredited school. Most require you to attend at least half time.
• Citizenship: Private student loans are usually available only to U.S. citizens and permanent residents. International students may qualify for a private student loan if an eligible citizen or resident co-signs the loan.
• Age: You must reach the age of legal adulthood — 18 in most states — before signing a contract for a student loan. If you’re not old enough, you’ll need to find an eligible co-signer.

5. Review repayment terms

Many lenders allow borrowers to choose from a list of repayment plans. These usually include:

• Immediate repayment: Start making payments as soon as the funds are disbursed. This can help you pay down the loan quickly and save on interest if you can afford payments while in school.
• Interest-only repayment: Pay interest while in school to keep your balance from growing too much. After graduation, you’ll make regular principal and interest payments each month.
• Full deferment: Postpone payments while you’re in school and for a grace period after you graduate or leave school. This could be a good option if you can’t work while in school. Once deferment ends, you’ll start making payments.

Some lenders also offer forbearance programs, which allow you to pause monthly payments during financial hardship. But you’ll eventually have to make up for the missed payments, and interest will add up on the balance.

Before applying for the loan, estimate your monthly payments and look at different loan terms.

A shorter loan term comes with higher monthly payments, but you’ll pay less interest overall. A longer term comes with lower monthly payments, but you’ll pay more in interest over the life of the loan.

6. Consider borrower options

Parents who want to help their student pay for college can take out private student loans. This can be a helpful option, especially for parents who have good to excellent credit and are likely to qualify for better interest rates than a student applicant.

It’s important for parents to shop around and compare rates, origination fees and loan terms to find the most competitive offer possible. Income, credit score and other requirements will vary from lender to lender.

It can also be a good idea to find out what rates you’d qualify for on a parent loan and then compare that option to your college student’s loan offers. That allows you to determine which borrower can access the most cost-effective loan.

7. Look at additional features

If you’re having trouble choosing the best lender, look to the fine print for more details. Some features or benefits could lower the costs of borrowing or make repayment easier:

• Autopay discount: You might qualify for a discount on your annual percentage rate if you sign up for automatic payments. This usually takes effect once you start making full principal and interest payments.
• Other savings opportunities: Some lenders provide other ways to earn money or save on the cost of borrowing. For example, they may provide discounts if you have another financial product with them, provide a cash reward if you refer a friend or reduce your principal amount once you graduate.

8. Check lender specifics

Look into any details that make the lender stand out over its competition, such as:

• Reviews: Check lender reviews online to see how they rank. Lender reviews can alert you to any issues with the lender, like difficulties processing payments or slow service representative communication. Check out how the lender rates with the Better Business Bureau or our student loan review page.
• Hardship programs: Check whether the lender offers deferment and forbearance programs, which allow you to postpone or pause your loan payments. While rarer with private lenders, these programs can help if you’re financially struggling or need a break from payments. Read the details to see when these programs apply and if interest will accrue while you’re enrolled.
• Discharge options: Sometimes, student loan debt passes on to the borrower’s estate after they die. Some lenders will discharge your student loan debt if you become permanently disabled or pass away.

9. Consider co-signer options

Many private lenders require co-signers for all borrowers or those with poor or limited credit history. Co-signers must have good credit and adequate income to repay the loan.

Check to see if the loan has a co-signer release. Your lender may remove your co-signer from the student loan debt after you make a series of on-time payments. Most lenders require you to make on-time payments for at least 12 months before qualifying for release.

Also, check the loan’s discharge policies about co-signers. If you got the loan after Nov. 20, 2018, it’s federal law for the co-signer on a private loan to be released if the main borrower dies. Check what happens when a co-signer dies, as that could leave the main borrower on the hook for the loan balance alone.

The bottom line

Private student loans are a solid option for students who don’t qualify for enough federal aid to cover their annual expenses. Choosing the best private loan must be a careful process. You may make payments for decades.

Borrowers should evaluate the unique fees, repayment terms and features available through various private lenders. After understanding their options, students can apply strategically to limit any negative impact on their credit score. Applying with a co-signer may also help boost the chances of being approved.

Ultimately, while federal loans offer more consistent interest rates and flexible repayment terms, private loans can help to cover costs after other options have been exhausted. Read up on how to get a student loan to get started.

Frequently asked questions

• How long does it take to get a private student loan?

  Private loans may be funded as quickly as within a few weeks after application. But some approval and disbursement processes can take up to two or three months.

• Can you switch lenders for your student loan?

  You can switch private lenders if you refinance your student loan. There are some benefits to refinancing, such as getting a loan contract with more favorable features, accessing better rates or finding terms that work better for you. Check with your lender about when you can refinance. Many have requirements such as being unable to refinance until after you graduate or withdrawing from school.