The cost of higher education continues to climb, and potential students are relying more and more on student loans. Depending on your university of choice and your financing decisions, you will likely apply for private student loans, as government loans only go so far. There are several options to choose from. And understanding what private student loans are is important when making your decision. This article will go into detail about private student loans are and what they entail.
What is a Private Student Loan?
A private student loan is a student loan that’s given by a more traditional lender such as a bank, credit union or other lending source. These are not tied to the government loans and typically carry higher interest rates. The reason private student loans exist are they bridge the gap between public loans and the total cost of education. Most notable names in the private student loan industry include Discover and Wells Fargo. The application is simple and can be done online, making it an easy option.
How a Private Student Loan Works
Private student loans work a bit differently from other forms of financing. With a private loan, the lender will need to verify your income, along with how long you’ve been in school and your current major. Many times, you’ll need a co-signer since it’s an unsecured loan. From there, once you’ve submitted your application you wait for the approval or denial of your loan. If approved, funds are deposited to your university’s finance department and any excess proceeds will be disbursed to you. The goal is to borrow only what you need. And during the source of your education, live on a tight budget.
Private Student Loan Interest Rates
While it’s difficult to narrow in on rates, you can anticipate rates being between 5% and 10%. Yes, they are expensive, and you need to plan accordingly. The reason it’s difficult to pinpoint an accurate interest rate is due to a few things. First, the interest rate is based upon the risk you pose as the borrower. If you are a bit more of a risk, you will be charged a higher interest rate. Risk factors include lower credit score or high debt-to-income levels. The good news is if you do obtain one, you can always refinance later to a more competitive interest rate.
How Can I Use a Private Student Loan?
The only way you can use it is to pay for educational expenses. That means you won’t be able to take out an additional $5,000 just because you can. Private lenders will run the loan amount through your university’s finance department. This ensures the funds are in line with the expected costs for the semester or year. While you can take a bit over your tuition amount, don’t expect a large disbursement.
Some of the advantages of a private student loan include a simple application and approval process. The process is exclusively online in many cases, allowing you to complete the process quickly and efficiently. Another benefit is while you may have a higher interest rate, you can always consolidate and refinance later on. Once you’ve established yourself as an employed individual earning a healthy income, many banks will see you as less of a risk and price you accordingly.
One of the major disadvantages of a private student loan are higher interest rates vs. government backed loans. Especially if you don’t have a job. Lenders understand going to school means you are less likely to work, however, they are making an investment. They know you’ll earn enough in the future to repay the loan. With that, you will likely be charged a higher interest rate. Another disadvantage is you’ll likely need a co-signer. Especially if you are taking out large student loan. The disadvantage is that your parents or other family members may be unwilling to co-sign, making it difficult to finance your education. Overall, private student loans are an effective way to finance the costs of education. As with any financial product, ensure you’ve done the proper research and are confident you can payback the loans at a later date.