Private student loans: What you need to know

Preparing for college is no easy feat. You're probably feeling excited, overwhelmed, and maybe a little confused about the whole college planning process. You're also probably thinking about how you're going to pay for college. There are many different options including financial aid, scholarships, and college savings — but what if that's not enough to cover the cost of college? That's where private student loans can come in. It may seem like a complicated topic, but we're here to help. In this article, we'll answer the following questions:

• What is the difference between a federal student loan and a private student loan?
• Who can take out a private student loan?
• Do I need a private student loan?
• What do I need to apply for a private student loan?
• How much can you borrow with a private student loan?
• How does repayment work for private student loans?
• What should be considered when selecting a private student loan?

The two main types of student loans are:

• Federal student loans: These loans are funded by the federal government. They usually offer lower interest rates than private student loans, however, there also may be lower limits on how much you can borrow. Most federal student loans do not require a credit check or cosigner. The interest rate on federal student loans is fixed and payments are usually deferred until after you graduate.
• Private student loans: These loans are provided by banks, credit unions and other lenders. You can expect a credit check as part of the application process, and students who may not have a credit score yet often need a cosigner. These loans can have fixed or variable interest rates and different repayment options.

Before applying for a private student loan, you should always start by filling out the Free Application for Federal Student Aid (FAFSA) to see what financial aid you may be eligible for. After deducting that amount, you'll have a better idea of how much you'll need to cover the rest of your college costs.

Private student loans are usually used to help bridge the gap between the cost of attendance (COA) and other financial aid you may receive. Your COA isn't limited to tuition — it includes other expenses associated with being a college student, such as books and supplies, housing, food, and transportation. If your total COA is covered by financial aid like federal student loans, scholarships, and grants, you don't need a private student loan. However, if there's a shortfall, you may need to consider one.

Eligibility requirements vary and most private lenders offer a variety of options when it comes to private student loans. There are private student loans for undergraduate students, but also specialized student loans for graduate students and even medical and dental school students. There are also options for parents to take out private student loans on behalf of their student.

Banks and other lenders consider a variety of factors when determining if you're eligible for a private student loan, including if you're attending an eligible school, if you meet enrollment criteria, your credit score, income, and if you meet the debt-to-income requirements (this is usually something only parents/cosigners need to worry about).

To obtain a private student loan, applicants pursuing an undergraduate degree often need a cosigner to have a higher likelihood of loan approval. At Citizens, 99% of undergrad student loans are cosigned.* Any person with a qualifying credit score and who meets the lender’s cosigner requirements can cosign the loan, but it’s usually a parent or guardian who will take on that responsibility. The cosigner will have to pay for the loan in the event the student can't or doesn't, so it's important to have a plan for repayment.

The application process for private student loans may differ from lender to lender, but here is a general checklist of what you need to do:

• Research your options: Compile a list of the lenders you've found and compare interest rates, fees, repayment options, eligibility requirements, and any other factors that may be important to you. Is it important to have your payments on autopay? Or maybe that you can receive a discount for having an account at that institution? These are all things you can consider when making comparisons.
• Gather your information: There are standard documents that most private lenders will ask you for, such as:
  • Social Security number
  • Recent paystub or other proof of income
  • Any monthly housing payment you may have
  • Your employer name/phone number/length of employment (if applicable)
  • The name of the school you plan to attend
  • Cost of attendance
  • Any financial aid received (you can find this on the award letter from your school)
  • Your anticipated graduation date/loan period/loan amount needed
  • A cosigner is encouraged — if you have one, you'll need their name and email address
• Complete your applications: The application process will often be similar from lender to lender. Once completed, the lender will start their process and notify you if you're approved or declined and any key details about the loan. Approval times can vary depending on the lender, but in general you should submit your application two months before your school's tuition due date.
• Compare offers: Once you start hearing back from lenders, you can compare your options. Make sure you read the fine print and learn as much as you can about how each loan works before you make your selection!

Most private student loans max out at your college's COA minus other financial aid. There may be borrowing limits for each lender as well. For example, let's say your college costs $50,000 per year and you have $40,000 available from financial aid and college savings. You would need another $10,000 and could apply for a private student loan to help cover that amount.

It's important to only borrow what's needed — you don't want to pay back more than you absolutely have to! Private student loan lenders typically certify the loan amount with the college to ensure you don't take out a bigger loan than necessary.

Some lenders may give you the option to borrow by semester or by the full school year. It's usually recommended to take out the loan for the full school year instead of taking out two loans, one for the fall semester and one for the spring semester. It can save you time, simplify the process, and you'll also have one less credit check for that year.

Some financial institutions, like Citizens, offer multi-year approval, which may make things easier. With multi-year approval, you'll only need to fill out the application once, and the lender will decide how much money you're qualified to borrow for every year of college. When your next school year rolls around, you won't have to fill out a new loan application. Instead, you'll just request additional funds from your lender, and they'll do a soft pull of your credit, just to make sure that your income and other factors haven't drastically changed. Once that's confirmed, you can request the amount you need from your remaining balance.

Depending on the type of loan and the lender, there are a few different repayment types and repayment terms that you may be able to choose from. Some repayment types are:

• Interest-only repayment: This requires you to make interest-only payments on the loan while you are still in college, then principal and interest payments after you graduate, leave school, or drop below half-time enrollment.
• Immediate repayment: You make full (principal + interest) monthly payments while you're in college.
• Deferred repayment: Lets you postpone payments while you're in school. Typically, deferred repayment begins six months after you graduate, leave school, or drop below half-time enrollment.

Compared to deferred repayment, the interest-only and immediate repayment options may help you save money on interest over the life of the loan and could result in a lower monthly payment after you graduate. Another factor to consider, for both interest-only and immediate repayment, is that it creates an opportunity for students to build their credit score earlier by making on-time payments on their private student loan while still in school. Whatever repayment option you choose, your decision should be based on your ability to repay the loan.

There may be options for the repayment term as well, which is the length of time the borrower has to repay the loan. You'll also want to pay attention to whether your loan has a fixed or variable interest rate. A fixed rate means that you'll have the same monthly payment for the duration of the loan. A variable interest rate is tied to market conditions, so your loan payment will fluctuate for the duration of the loan as interest rates change.

This is another decision that will vary based on whatever loan is the best fit for you and your financial situation. Some factors you should take into consideration are:

• Interest rate/APR: What is the interest rate and annual percentage rate (APR) on the loan? You'll want to look for competitive rates, but keep in mind that factors like repayment type, repayment term, and rate type will impact it, in addition to many others.
• The credibility of the lender: Seek out well-known lenders that have a strong track record of being reliable and trustworthy.
• Perks: Will there be a discount if you open a checking account at the financial institution or if you use autopay? A lot of banks offer autopay and loyalty discounts if you're an existing customer, so make sure you look into that!
• Customer service: Should you wish to see someone in person, are you able to head over to a branch for personalized customer service?
• Fees: Be sure to do your research and read the fine print. Are there any origination, disbursement or other fees associated with the loan?

Hopefully by answering these questions, you'll be able to decide which loan is best for you and your college journey.

There's a lot to consider when you or a family member are about to take out a private student loan — they're a big commitment with lots of different options. We've been helping families afford college for over 40 years, so we're happy to offer some of our best-in-class advice. Head to our Student Loans page for more tips and to see our latest rates and information.