Private loans
While private student loans have a higher interest rate on average, it may be possible to get a private student loan with an interest rate as low as 3% if you have excellent credit. Taking out a loan can be a significant financial decision, so it’s best to always do your research and make sure you are well-informed about borrowing a loan. Below we provide some information to begin your research:
Qualifying for a private student loan
Each lender will have its own requirements for taking out a loan. With most loans, credit score and income are taken into account. Higher scores and incomes tend to get the best rates or higher borrowing amounts. However, since undergraduate borrowers are less likely to have established credit or an income, lenders will usually require students to apply with a co-signer. A co-signer is someone—such as a parent, close family member, or friend—who applies for a loan with another person and legally agrees to pay off their debt if they aren’t able to make the payments.
Choosing a private student loan
Compare offers from multiple sources like banks, credit unions, and online lenders to find the lowest interest rate. Depending on the lender, you may be able to choose a fixed or a variable interest rate. A fixed-rate stays the same throughout the life of a loan. A variable rate may start lower than a fixed rate but could increase or decrease over time depending on economic conditions. A loan can be a resource to help aid with tuition, but make sure to always do your research, so you are well informed about the risks associated with taking out a loan.
Make sure to consider any deferment and forbearance offers the lender may offer, as well as repayment options and other important terms. You may also have the option to choose your loan term, which means you could pay off your loan at a pace that works for you.
Private student loans vs. federal student loans
You apply for a federal student loan by submitting a FAFSA. Taking on a federal loan means you’re borrowing a loan funded by the government. You apply for a private student loan through a bank, credit union, or online lender.
According to the Federal Student Aid website, Federal student loans offer borrowers protections and alternative repayment options that private loans may not, such as income-based repayment and forgiveness programs. Federal student loans also have flat interest rates set by the U.S. Congress. Interest rates on private student loans vary and depend on the credit rating of the recipient or that of the co-signer. Without a high credit score, you’ll likely pay a higher interest rate for a private loan than you would for a federal loan. Visit the Federal Student Aid website to learn about current interest rates.
