Private loans for college may help you reach your education goals, but should not be your first consideration for financial assistance; they often have higher interest rates than federal loans, as well as stricter qualification and repayment rules. The nature of the private student loan sector means it thrives as a result of periods of stagnation or economic downturn for its direct competitor: federal student loans.
With aggregate loan limits for federal Stafford loans holding stable from 1992-2008, private loans historically showed slow and steady growth throughout this period as an alternative for students who exhausted all federal aid. However, the subprime mortgage credit crisis of 2007-2010 limited the means by which lenders could access the capital needed to make new loans, halting development within the private student loan marketplace. The growth of private student loans was impacted yet again by an increase in Stafford loan limits in 2008, which reduced private loans to half of their previous volume.
In recent years, the private student loan sector regained its footing in the lending marketplace; barring any specific federal loan limit increases or, worse yet for private lenders, annual federal loan expansions, private loans are expected to return to a growth volume in the double digits — possibly even surpassing their pre-2008 growth of 25-35% each year. Should this trend continue, annual private education loan volume could eclipse federal student loan volume entirely by the year 2030. While students are encouraged to explore private loans for college as a supplement only to other types of aid, it can be challenging to know where to start. Sallie Mae, a source of private college loans, recommends the "1-2-3 approach":
- "Look for free money" that doesn't have to be paid back, such as scholarships, grants, and work study programs.
- "Consider federal loans," most of which have lower, fixed interest rates and multiple options for repayment.
- "Fill the gap with private education loans" to help pay remaining expenses, while exploring ways to minimize debt after graduation.
Where to Look for Private College Loans
There are many organizations willing to lend money to students, but it is in each student's best interest to compare options and understand the terms available. Each lender determines its own eligibility requirements, interest rates, and repayment options. Below, we take a closer look at three major lenders providing private loans for college.
- Sallie Mae
- Prime Lending Rate: Variable rates from 2.87% to 9.91%; 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: From $1,000, up to 100% of "school-certified costs of education."
- Calculating Repayment: Use the Smart Option Loan Repayment Calculator to estimate repayment and interest amounts.
- Discover Student Loans
- Prime Lending Rate: Fixed rate from 6.24% to 11.49%; Variable rate as low as 3.74% to 9.24%.
- Fees: No fees.
- Repayment Periods: 15 years; deferment and multiple payment options available.
- Eligibility: U.S. citizen, permanent resident or international student (some restrictions apply); enrolled in at least a half-time degree program at a qualifying school; 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); minimum loan amount of $1,000.
- Calculating Repayment: Use the Monthly Payment Calculator to generate an estimate.
- Wells Fargo
- Prime Lending Rate: Fixed rate from 6.17% (with discount) to 11.26% (without discount); Variable rate from 3.86% (with discount) to 9.46% (without discount).
- 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 could make private loans an ideal 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 to them. Federal loans have limited applications and are typically required to be used directly on tuition, books, or fees. A private lender can provide a personal loan to 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 following private borrowing options available to unique borrowers:
Wells Fargo Student Loan for Parents: Wells Fargo offers a loan program for parents looking to fund their child's college experience; the loan is also open to the student's grandparents, friends, or step-parents. 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. Students with a positive credit history who hold U.S. citizenship qualify. This loan also allows students to choose from fixed or variable interest rates, depending on which option best suits their needs.
- Medical Residency & Relocation Loan: This private loan offered through Sallie Mae grants students a three-year grace period before they must start repayment. Available aid ranges from $1,000 to $20,000, and interest rates vary anywhere from 3.82% APR to 10.19% APR. Interest can be reduced by .25 of a percentage point if the borrower or cosigner enrolls in monthly auto-payments.
- Law School Students
Discover Law Loans: This private loan is available at a fixed interest rate of 6.24% to 10.99% or a variable rate of 3.74% to 9.24% 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 provide a cosigner if their credit score is low or they have not established credit in their name.
Borrowers' Rights and Responsibilities
When you accept private loans for college 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 throughout the process, including selecting the best repayment options to help you manage student loan debt.
New legislation to protect the rights of borrowers has been implemented within the last five years. 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 are:
- Repayment plan options to help avoid defaulting on loans
- Information about loan terms and conditions, with respect to 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, some of which were summarized by the CFPB in its most recent report in 2015.
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 might 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) and can affect your finances for years to come. Figuring out how much money to borrow for college expenses should include a lot of research into your own finances and the assistance available to you. 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, or take traditional or online courses, you will have living expenses including housing, utilities, food, and more. Do you know your current expenses in these areas? 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 academic semester or 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. Many colleges and universities provide net price calculators like this one by the College Board to help estimate costs.
- Grants and Scholarships: These sources of financial assistance do not 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 grants and 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 its own separate work-study initiatives to help you find employment both 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 a realistic idea of what to expect regarding compensation as a new college graduate. PayScale.com is one resource students can use to find out what workers in specific fields currently earn.
While everyone's formula for borrowing will be different, FinAid.org suggests considering borrowing 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. It may be tempting, if offered, to borrow more financial aid than you actually need, but remember to carefully review all costs and calculate repayment amounts for respective loans. Then borrow only what is required to complete your program and what you will be able to repay after graduation.