After scholarships and grants, federal student loans are usually the go-to for financing a college education—and with good reason. The rates are generally competitive, and the benefits are very flexible. That said, sometimes federal student loans will not cover the full cost of a college education, and in some cases, such as with Grad PLUS or Parent PLUS loans, the rates are not as good as with private student loans, for borrowers with excellent credit.
In this article, we will take a closer look at private loans for college—when to use them, how your rate is determined, and how to apply.
When to use private student loans
When your college’s financial aid office sends your award letter, you may find that there is a gap between your scholarships, grants, and federal student loans, and the total cost of your education. Two common ways to fill this gap are:
- Family college savings – If you or your family have been saving money to help pay for college, this is an easy choice.
- Private student loans – Take out a loan from a bank or financial institution to cover the difference.
Private student loans are similar to federal student loans—you are still borrowing money for your education and agreeing to pay it back over time. But, instead of the government lending you money, it is a bank or financial institution.
With private student loans, you don’t get federal benefits like forbearance, income-driven repayment plans, and access to Public Service Loan Forgiveness. But, most private lenders do offer flexible repayment plans and have their own unique sets of benefits. For instance, many lenders will offer deferment if you decide to pursue an advanced degree after graduating.
Also, some types of federal student loans, like Grad PLUS and Parent PLUS loans, come with higher rates than other federal loans, as well as sizeable loan fees. For the 2018-2019 school year, federal PLUS loans have a 7.60% interest rate, as well as a loan fee of 4.248%.
Borrowers with excellent credit (or a cosigner with excellent credit) can save a lot of money by choosing a lower rate on a private loan, if the federal benefits aren’t as important to them. If you are a graduate student or parent with excellent credit who already has good job security and just wants the best rate possible, private student loans may be the best option. All of Purefy’s lenders have no origination fees or prepayment penalties.
How your private student loan rate is determined
Each lender has its own set of criteria for determining your interest rate, but usually the biggest factors are the type of degree you are pursuing and your credit score.
Your credit score, which is based on your credit history, basically tells lenders how good you have been over time in managing your debt and making payments on time. Unfortunately, most students—particularly undergraduates—don’t have much of a credit history and will require a cosigner to get approved.
A cosigner is someone who signs on to the loan, and is equally responsible for it, should you be unable to make the payments at any point in the future. Usually this is a parent or relative. Having a cosigner with great credit will help you get the best rate on your private student loan.
How to find the best private student loan rate
The best way to find out what kind of rate you will get and see your future monthly payments is to use Purefy’s rate comparison tool. This tool is essential because it lets you compare actual rates from multiple lenders, based on an estimate of your (or your cosigner’s) credit score, and a few other basic details.
Most comparison sites online only include rate ranges, which tell you little to nothing about the actual rate you will receive when you get a private loan for college. Even a difference in your interest rate as small as 1% can have a huge impact on the total cost of the loan over time. Our tool lets you see this difference with total transparency.
How to apply for private student loans
Once you’ve gone through our comparison tool and selected a lender, you will be directed to their application, where you will be asked for information about yourself and your cosigner (if applicable). This usually will include:
- Contact information
- Social security number
- Employment and income information
- School information
- A reference (someone who the lender can contact to help find you if your contact info changes)
After you apply, you and your cosigner will be asked for documents to verify the information listed on your application—items such as a photo ID and paystubs or tax returns. Once everything is approved and you’ve signed your credit agreement (also called a promissory note), your funds will be sent out.
The application, approval, and disbursement process can take anywhere from a few weeks to two months. While you can apply any time during the year, we recommend you allow enough time to get through the process and meet your tuition deadlines.
And, as always, if you’ve applied already or if you just have questions, you can always feel free to reach out to our award-winning customer service team at 202-524-1115, by email at [email protected], text at 202-900-9014, or by web chat.