The first day of school is quickly approaching. For those heading into college, that means the time to arrange financial aid is almost up.
Scholarships and grants are the best forms of aid, as they don’t need to be repaid, but to fill in the gaps, student loans can help. There are two types of these: Federal student loans, which are issued by the U.S. Department of Education, and private ones. Private loans are issued by private companies and can vary widely in length, interest rate, eligibility requirements and more.
Are you applying for private student loans to fund your educational pursuits this school year? Here’s what experts say to consider.
Begin exploring your private student loan options here now.
What to look for in a private student loan, according to experts
Take a close look at the following things when evaluating your private student loan options.
Interest rate
The interest rate is one of the most important things to consider when considering a private student loan. Not only will the rate impact your monthly payment, but it will greatly influence the long-term costs of your student loan debt too.
Obviously, a lower rate is better than a higher one, but you should also look at the kind of rate a private student loan lender is offering.
“The main factor you should consider is whether or not your interest rate is variable or fixed,” says Nate Hoskin, founder and lead advisor at Hoskin Capital.
With a fixed private student loan interest rate, your rate and payments will stay the same the entire time you have the loan. Variable interest rates, on the other hand, are the opposite. They adjust regularly, meaning they can rise or fall, taking your monthly payment up or down with them.
Co-signer requirements
You should also consider whether you have a co-signer or not. A co-signer is an adult who agrees to share in the legal responsibility of the loan with you — meaning they’ll have to make payments in your place if you fail to.
In many cases, private federal lenders require a co-signer — especially if you have no credit or a low credit score. For these reasons, “Not having access to a willing co-signer can be a non-starter,” says Derek Brainard, national director of financial education at AccessLex Center for Education and Financial Capability.
If you don’t have a co-signer and a lender is still willing to offer you a loan, look at the interest rate carefully. Many will charge higher rates without a co-signer on board.
Fees
In addition to the interest rate, private student loan lenders charge a variety of fees to borrowers. These might include origination fees, application fees and more.
And that’s just upfront. Be sure to read the fine print and learn about any fees you may incur once you have the loan, too — things like late payment fees, payment return fees, forbearance fees and deferment fees. There may also be fees for refinancing later on if you choose to go that route.
Repayment options
There are many repayment options when it comes to private student loans. Some lenders may require you to make payments while in school, while others may give you a grace period and allow you to defer payments until after graduation.
Repayment terms also vary in length, ranging from a few years to up to 25 years in some cases.
“When it comes to repayment terms, it is critical to understand the options, which may have different outcomes related to how much you’ll end up paying over the course of the loan term,” says Kristin Balazentis, senior vice president of student lending at PNC Bank. “Shorter terms usually mean higher monthly payments, but less interest will be paid over time.”
You should also look at hardship repayment options if the lender has any. These might include things like forbearance or deferment, which let you put your payments on pause for a certain period if you fall on hard times.
Discounts
You should also look at any potential discounts a lender might offer. Many private student loan companies offer rate reductions for borrowers who turn on autopay.
Some may also offer discounts for graduating on time, opening a bank account or taking out another loan with the same lender or making on-time payments. Even a small rate discount can make a big difference on your monthly payment, so be sure to compare these carefully across companies.
Shop around for private student loans here to find the best offers for you.
Red flags
Finally, look out for red flags when comparing private student lenders and loans. The biggest one to watch for is poor customer service.
“Look out for unresponsive customer service or lenders who may not be entirely forthcoming when responding to specific questions,” Balazentis says. “This could be a sign of potential communication problems and headaches down the road.”
You should also check for bad reviews, look up the lender’s rating and any complaints with the Better Business Bureau and avoid companies with aggressive selling tactics.
As Balazentis puts it, “It’s best to avoid lenders or loans without transparent terms and conditions, those charging excessive fees or those pressuring the prospective borrower to sign quickly.”
Consider federal student loans first
While private student loans can help with your higher education costs, it’s important to exhaust your federal options first. These usually have lower interest rates and more favorable terms, as well as perks like loan forgiveness and income-based payment options.
Only once you’ve used all your federal options should you consider a private student loan.
