Private student loans may help you reach your education goals, but should not be your first consideration for financial assistance. These loans often have higher interest rates than federal loans, as well as more strict qualification and repayment rules. Sallie Mae, a source of private loans, recommends the “1-2-3 approach:”
- 1. “Look for free money” that doesn’t have to be paid back, such as scholarships, grants, and work study programs.
- 2. “Consider federal loans” most of which have lower, fixed interest rates and multiple options for repayment.
- 3. “Fill the gap with private education loans” to help pay remaining expenses, while exploring ways to minimize debt after graduation.
There are many organizations willing to lend money to students, but it is important to compare the options and understand the terms available. Each lender determines its eligibility requirements, interest rates, and repayment options. Let’s take a closer look at three major student loan lenders.
- Prime Lending Rate: Variable rates from 2.25% to 9.37%; Fixed rates from 5.74% to 11.85%
- Fees: No origination fees.
- Repayment Periods: There are multiple options available, which include paying while still in school to minimize overall costs.
- Eligibility: U.S. citizen or permanent resident; meet requirements at time of application
- Amount Available to Borrow: Up to 100% of “school-certified costs of education”
- Calculating Repayment: Use the Smart Option Loan Repayment Calculator to explore the options.
- Prime Lending Rate: Fixed rate from 6.74% to 10.99%; Variable rate as low as 3.25% (Prime Index + 0.00%) to 8.25% (Prime Index + 5.00%)
- Fees: No fees.
- Repayment Periods: 15 years; deferment and multiple payment options available
- Eligibility: U.S. citizen, permanent resident or international student (some restrictions); enrolled at least half-time at an eligible school in a degree program; satisfactory academic progress once enrolled; credit check; 16 years or older
- Amount Available to Borrow: Up to 100% of tuition, housing, books and other fees (depending on type of program, e.g., undergraduate, law, MBA)
- Calculating Repayment: Use the Monthly Payment Calculator to generate an estimate.
- Prime Lending Rate: Fixed rate from 3.17% to 8.60%; Variable rate from 6.17% to 10.93%; discount programs available
- Fees: No fees.
- Repayment Periods: Up to 15 years; forbearance options and consolidation programs available
- Eligibility: Enrolled at an eligible school as a degree, certificate, or license-seeking student; U.S. citizen, permanent resident, or other status (with restrictions); meet loan qualification requirements at time of application
- Amount Available to Borrow: School-certified costs of education minus other aid received
- Calculating Repayment: Use the Private Student Loan Calculator to estimate your monthly payments.
Note that all terms are subject to change. Conduct your own research and carefully compare the options available when you are ready to apply.
Specialty Loans from Private Lenders
There are a number of circumstances that will make private loans the best option for a student or their family. For instance, if direct tuition is not a student’s greatest expense during school, most federal loans will not be useful. Federal loans have limited applications and must usually be used directly on tuition, books or fees. A private lender can provide a personal loan can help alleviate the non-school related expenses that actually enable you to attend school — i.e. a car payment, childcare, medical expenses, travel costs or specialized graduate or professional school fees that aren’t covered by federal aid options.
Consider the unique private borrowing options available to unique borrowers:
- Wells Fargo Student Loan for Parents: Wells Fargo also has a loan program for parents looking to fund their child’s college experience, but they may also be the student’s grandparent, friend, or step-parent. The loan covers up to $25,000 per school year at either a variable or fixed interest rate.
Medical School Students
- MedCAP Loan Program: The MedCAP Loan is a private loan offered through Wells Fargo that allows students to borrow as much as they need with no annual maximum. To qualify for this loan, students are expected to have a positive credit history and hold U.S. citizenship. This loan also allows students to choose from fixed or variable interest rates, whichever one best suits their needs.
- Medical Residency & Relocation Loan: This private option is offered through Sallie Mae and grants students a three-year grace period before they must start repaying their loan. The assistance offered ranges from $1,000 to $20,000, and interest rates vary anywhere from 3.21% APR to 11.56% APR. That amount can by adjusted by .25% if a student holds an account at Sallie Mae.
Law School Students
- Discover Law Loans: This private loan is available at a fixed interest rate of 6.79% to 7.89% APR to graduate students who are enrolled at least half-time. Students are not required to pay back their loan while in school and can receive a lower interest rate if they qualify for the Auto Debit Reward program. Students must pass a credit check to receive this loan, and if they aren’t in good credit standing, they’ll need to provide a cosigner to receive the loan.
Borrower’s Rights and Responsibilities
When you accept a loan from a federal or private lender, you enter into a contract with that lender that outlines the expectations of all parties during the life of the loan. As stated by the American Student Assistance advocacy organization, “simply put, you are responsible for paying your loan – whether or not you finish your education or are satisfied with your education.” However, as a borrower you also have rights in the process, including having repayment options to help you manage student loan debt.
New legislation has been proposed to protect the rights of borrowers. In December 2013 U.S. Senator Dick Durbin (D-IL) introduced a bill with the goal of “ensuring struggling student loan borrowers are treated fairly and understand the full range of repayment options and resources available to them.” The six basic rights included in the bill include:
- Repayment plan options to help avoid defaulting on loans
- Information about loan terms and conditions, and repayment options
- Information about and ability to contact loan servicers
- Consistent application of monthly payments, as well as advertised promotions and offers
- Fairness during loan transfers and hardship conditions
- Accountability of lenders to resolve problems and address issues
The U.S. Government’s Consumer Financial Protection Bureau (CFPB) also recently addressed student loans, ruling that it can now “oversee nonbank student loan servicers” in addition to its existing oversight of bank servicers. The goal of the CFPB’s advocacy in this area is to “make the student loan market work better for consumers” through evaluation of known problems and frequent complaints.
Determining How Much to Borrow
While borrowing money to pay for education expenses is sometimes referred to as “good debt,” taking on more debt than you can handle, whether it is good or bad, can be devastating. Defaulting on a loan, for example, can result in a bad credit rating or low credit score that would prevent you from taking out other loans (e.g., mortgage, auto, small business).
Figuring out how much money you should borrow for college expenses should include a lot of research into your own finances and the assistance available. The following considerations provide a good starting point:
- Employment and Savings: You may plan to work while you are taking classes or use some of your savings to offset expenses. Carefully consider what you and/or your family may be able to contribute to the costs associated with your education.
- Cost of Living: Whether you live on or off campus, take traditional or online courses, you will have living expenses, such as housing, utilities, food, and more. Do you know what you are spending now? Examine your budget and anticipate changes that may take place when you start school
- Tuition and Fees: Know how much it will cost you each semester or academic term to attend your college of choice. Public institutions often offer a lower tuition rate for in-state students. Don’t forget to include any additional fees and expenses, such as textbooks. Online net price calculators provided by colleges and universities provide a way to estimate costs.
- Grants and Scholarships: These sources of financial assistance don’t have to be paid back. Some are merit based while others are awarded based on financial need. Federal grants can be awarded through your FAFSA application. Check sites like FinAid.org, as well as your school’s financial aid office, for more information about scholarships.
- Work-Study: More than a part-time job, work-study programs often allow you to gain experience in your field of study as a student while getting paid. The federal work-study program is awarded through the FAFSA, but your school may have separate initiatives to help you find employment on and off campus.
- Expected Income: What kind of salary do you expect to earn after you graduate? While nothing is guaranteed, and salaries vary by location and level of experience, you should have an idea of what to expect regarding compensation as a new graduate. PayScale.com is one resource for finding out what workers in specific fields currently earn.
While everyone’s formula for borrowing will be different, FinAid.org suggests “a good rule of thumb is to borrow about 125% of the difference between your net college costs and the amount of income and savings you can devote to paying these costs, rounded up to the nearest $1000.” You may find that the amount of financial aid you are offered is more than you need. Carefully review the costs and calculate repayment amounts. Then borrow just what is required to complete your program and what you will be able to repay after graduation.