How Do Private Student Loans Work?
If you’re looking at going to college, odds are you’re like the millions of American students who can’t afford it on their own. Getting a student loan is an option taken advantage of by many, but there are different kinds to consider. If you don’t wish to go down the federal loan route or you simply need more money than it or scholarships have provided, a private loan might be the best option. But how do they work?
What’s the Difference Between Private and Federal?
A private student loan is just that — private. It is offered by a lender that is not affiliated with the government. Sallie Mae is one of the most well-known student lenders, but most banks are capable of offering student loans. However, while private loan payouts are usually higher than federal payouts, they often carry higher interest rates and don’t come with some of the benefits government loans do (income-based payment plans, loan forgiveness, etc.).
You’ll Need a Co-Signer
Most lenders require that you have an established work history and a good credit score (no less than 700). 18-year-olds typically do not have either of those things, so you shouldn’t even think about a private loan unless you can get a co-signer who qualifies. Most students have parents that fit this bill, but it can be anyone that’s willing to co-sign and meets the requirements. However, it’s important you both understand the risks you face in doing this. Private loans offer none of the loan forgiveness programs federal loans do, so if you default, your co-signer will face serious financial repercussions. Be careful.
You Might Not Get One
Lenders have every right to refuse to lend to you, and many will. If you don’t have a co-signer, it will be very hard to get approved for a loan. You’ll need the high credit score and stable work history we mentioned above. Unless you’re entering school at a later age or after having been in the workforce for a while, it’s likely you won’t meet these two criteria. A co-signer will help, but only if they have a good credit score and work history. This is not money you can necessarily count on, so keep that in mind when thinking about how best to finance your education.
They’re Not a Full Ride
Sallie Mae, an incredibly popular student lending service usually tops out their student loan payouts at $10,000. Depending on where you’re planning to attend, this won’t get you that far, and it’ll come with a potentially high or variable interest rate. You should always be on the lookout for other sources of free money. Check out scholarships, federal grants or even crowdfunding to pay for your tuition. The private student loan process can be beneficial for some, but it’s always best to shop around. Schools like New York University or UAB are great, but they aren’t cheap, so every little bit helps.