As long as you donâ€™t go overboard, private student loans can be a useful tool for covering college costs. But donâ€™t forget that private lenders set their own requirements for student loans, which differ from those set by the federal government.
If youâ€™re looking to borrow, youâ€™ll need to know how to qualify for private student loans, as well as how to find the best rates. Here are the five main private student loan requirements, followed by some tips on finding the most affordable student loan.
As the name implies, private student loans are reserved for students â€” this means youâ€™ve enrolled in college or graduate school for the coming semester. Some lenders also require that youâ€™re attending at least half-time.
However, there are also lenders that offer loans to parents paying for their childâ€™s education. Sallie Maeâ€™s Parent Loan, for example, lets parents cover the full school-certified cost of attendance at their childâ€™s college, graduate school or other degree-granting program.
Either way, the borrower typically must be a U.S. citizen or legal resident whoâ€™s 18 years of age or older.
Not only must you meet certain requirements for private student loans, but your school has to be eligible as well. Each private lender will have its own student loan requirements, lending to some schools but not others.
Check with the individual lender to ensure your school qualifies. Note that some lenders only operate in certain states, so your location could also play a factor here.
You might love a few thousand dollars in your pocket for spring break, but private student loans are supposed to be used only for qualifying educational expenses, such as tuition, fees, books and living costs.
After you apply for a private student loan, the lender will likely talk to your schoolâ€™s financial aid office to verify your request. The school will then check to make sure the amount matches its estimated cost of attendance. It will also share any other financial aid youâ€™ve received, such as federal student loans, scholarships or grants.
This certification process can actually be helpful, as it could prevent you from borrowing more than you need. Since youâ€™ll have to pay back your loan with interest, itâ€™s important not to borrow too much.
After the school confirms your loan amount, most lenders will send the funds directly to your financial aid office. If thereâ€™s money left over, it will be returned to you to use on books, housing, meal plans, transportation, medication, dependent care or other necessary expenses.
Although less common, some lenders will send the funds directly to you. In this case, itâ€™s your job to pass on the money to your financial aid office to apply toward your tuition bill.
Either way, remember that you donâ€™t have to keep excess loan money if you discover you borrowed too much. Youâ€™re likely better off returning that extra money to your lender to avoid paying interest on it.
Whatever expenses you can cover with savings, a part-time job or scholarships could help you avoid taking on a burdensome amount of student debt.
So far, the requirements for private student loans probably donâ€™t seem that different from the requirements for federal ones. You have to be a student at an eligible school, and you must use your money on qualifying educational expenses.
But hereâ€™s where private lenders differ from most loans offered by the federal government: they require a credit check to take out a loan. In general, private lenders only approve creditworthy applicants who have a stable income.
This credit check reassures the lender that you have a history of paying back debt on time, as well as the means to do so. So when you submit a full application, you might be required to provide documentation, like pay stubs, monthly rent bills and bank account balances, as well as submitting to the credit check.
Of course, many undergraduate students donâ€™t have strong credit yet, so they canâ€™t qualify on their own. Thatâ€™s where a cosigner comes in.
If you canâ€™t qualify for a private student loan on your own, you can improve your chances by applying with a cosigner. Youâ€™ll need a cosigner with decent credit and a strong income to qualify for a private student loan.
According to data firm MeasureOne, more than 92% of private undergraduate loans were issued with a cosigner in the 2018-2019 school year. These student borrowers had a parent or another adult sharing their loan application and providing the required documentation â€” pay slips, bank statements, etc. â€” in their stead.
Before enlisting a cosigner to meet private student loan requirements, make sure you understand the significance of sharing debt. Your cosigner will be just as responsible for paying back the debt as you are, and their credit could be harmed in the event you canâ€™t pay.
Make sure you and your cosigner have a discussion about expectations before taking on debt together. You should also look into options such as cosigner release or student loan refinancing if you ever want to take your cosignerâ€™s name off the loan and assume full responsibility for the debt yourself.
Once youâ€™ve prepared for private student loan requirements, your next step is shopping around for a loan. Fortunately, many lenders make it easy to compare offers online in just a few minutes.
With a pre-qualification check, you can enter a few basic pieces of information and see your loan offers with no impact on your credit score. If you see one you like, you can then go on to submit a full application.
This step is really useful, as it enables you to find a loan with the best rates. Letâ€™s say, for example, you want to borrow $15,000 on a 10-year repayment plan. One lender offers a rate of 8.5%, which would cost you $7,317 in interest over 10 years. But after hunting around some more, you find a rate of 6.5%, which would only cost you $5,439 in interest over that same period â€” nearly $1900 in savings.
Taking the time to find the best rate could save you hundreds or even thousands of dollars over the life of your loan. So, along with learning about how to qualify for private student loans, make sure to compare offers from multiple lenders.
That way, you can earn your degree while feeling confident youâ€™ve found the best deal for a private student loan.