In the U.S., taking out loans to finance education has become increasingly common. In fact, 45 million borrowers currently owe a total of $1.75 trillion in federal student loans dedicated to paying for education expenses.
Because the cost of college education continues to rise, the average amount of loans taken on by students at public universities has reached $30,030. Often, federal student loans may not be enough to cover the full cost of a student’s college tuition.
This is why many borrowers turn to private student loans to help finance their education expenses. In all, 2.4 million borrowers are utilizing private loans to pay their way through school – meaning if you’re considering a private loan to help finance your college education, you’re not alone.
If you’re new to taking out private student loans, here’s what you need to know before getting started.
What Are Private Student Loans?
There are two ways most students pay for their college education: federal loans and private loans. The U.S. Department of Education offers federal loans, while private loans come from a bank, credit union, or lender.
When you apply for private loans, the rates and terms you receive are primarily based on your credit history. If your credit history is thin or lacking significant history, you might consider applying for loans with a cosigner.
Important Factors to Consider with Private Student Loans
If you’re thinking about taking out private student loans to finance your education, there are a few important elements to consider:
Private Student Loans and FAFSA
When you apply for federal loans, you’ll have to start by filling out the Free Application for Federal Student Aid (FAFSA).
Private student loan lenders do not always require that borrowers complete the FAFSA in order to obtain a loan, however many schools require students to complete the FAFSA in order to borrow a private student loan. It’s best to understand what will be required by your school as you move forward with exploring private student loans. After you’ve exhausted all scholarship and grant options, and reached the federal borrowing limit, private student loans could help bridge the financial gap.
Private Student Loans May Cover the Total Cost of your Tuition
Federal loans are considered a form of aid, so the government limits undergraduate borrowers to up to $12,500 annually (up to $5,500 for Freshmen, up to $6,500 for Sophmores, and up to $7,500 for Juniors and Seniors). Many borrowers find that they can’t cover the full cost of attending college with federal student loans.
Private loans often provide higher borrowing limits, allowing many students to cover the full cost of attendance (minus any federal aid received). So even if you apply for federal loans first, private loans can help to fill in the gaps in your funding.
Flexible borrowing options
As long as you meet the credit and income requirements, you can qualify for private student loans. And most private lenders offer both fixed and variable interest rates, whereas federal loans only come with fixed rates.
Potential for lower rates
The government sets the rates for federal loans, but with private loans, your rates will depend on your creditworthiness. So, if you have good credit or can apply with a cosigner, you may receive a lower rate with a private student loan.
Reasons A Student May Consider Applying for Private Loans
Let’s look at a few scenarios when it may make sense to apply for private student loans:
- You need higher loan limits: If you’re a first-year college student, you can only borrow $5,500 in federal loans. These borrowing limits increase as you get further in school, but they still may not be enough to cover the full cost of college. Private loans may assist you in filling the gap to cover the entire cost of your education, minus any financial aid you’ve received.
- You have good credit: If you have excellent credit or can apply with a cosigner, then you may qualify for rates that are below federal interest rates.
- You’ve compared your options: Because private loans are offered by private lenders, you can shop around for different options and choose your lender. Even if you need the funding right away, you may not want to settle for the first offer you get. Apply with several different lenders and see which one offers you the best rates and terms.
- You need funding quickly: Applying for private student loans may offer a faster application and funding process. If you need the financing quickly, you may want to consider private loans.