Paying for college and calculating future debt of private loans can be stressful whether you are an entering freshman or a returning student. As college cost continue to rise more families are facing funding gaps when it comes to paying the tuition bill each year. With the student only able to finance $5,000 to $10,000 of federal student loans per year, the balance needs to be borrowed either directly or indirectly by the parent or another person. The two most common borrowing options are the federal Parent PLUS loans or private student loans.
Understanding the various loan options, legal responsibility, interest rates and fees can be overwhelming. Most people do not realize that a student’s debt structure will determine their repayment options. These loan decisions are unique to each student and family. If you are just starting the process of making a loan decision visit our article on the ultimate guide to student loans first. For this article, we focus on the use of a private loan to help pay for college.
How much can I borrow with a private student loan?
A private student loan is obtained through a bank, credit unions or other financial institution. The loan amount is limited by the college based on each student’s financial aid award. It is calculated by using the student’s cost of attendance less any financial aid the student has received as stated in the student’s award letter. Here is an example of the loan limit of a private student loan:
College Cost of Attendance $50,000 (Tuition, Room, Board, Books, & Expenses)
Less Scholarship $10,000
Less Grant $ 5,000
Less Direct Stafford Loan $ 5,500
Private Loan Limit $29,500
Who is legally responsible for a private student loan?
The student is the borrower when using a private student loan. In most cases, a private student loan will require a cosigner. The cosigner is responsible in case of default. Many cosigning do not realize the legal responsibility of cosigning for a student loan. It will also appear on their credit report until they are released from the loan by the lender. This release could take years.
The person who cosigns for the loan is normally a parent or a relative of the family. As it will appear on their credit report any missed payment will affect their credit score and could be an issue if they need to finance something themselves since it will affect their debt to income ratio when applying for financing.
Both borrower and co-signer need to remember that these are student loans and they have different rules than most other debt. Student loans are rarely forgiven under bankruptcy and this could be a burden for both parties if something should change.
There is some good news, there are lenders who have private loans for students in their third and fourth years, that do not require a cosigner. This is where you, as the consumer will need to do some research.
What interest rate can I expect to get?
To obtain a private student loan the lender will examine both the student’s and cosigner’s financial history and credit score. The interest rate is based on this combined review. The interest rates can be variable and fixed. The variable rates will normally be lower and often have a limit to them to protect the borrower. It is important for the student to maintain a good credit rating while in college since this could have a direct relationship to the interest they will qualify for when applying for future private student loans.
To get the best rate, both the student and co-signer will need to have a good credit rating. This will be important for future student loans and the co-signers release in the future.
Other features to consider in a private student loan.
No matter who the private student loan co-signer is they need to do some additional research. Each private loan has its own origination fee, ways of calculating the interest and release for the co-signer from the loan after repayment starts. Here are some additional features to be looking for in the private student loan lender:
- Life Insurance Benefit – This would forgive the private loan outstanding balance if the student should die.
- Disability Benefit – This would forgive the private loan outstanding balance if the student should become permanently disabled.
- Hardship Benefit – An agreed amount of time where required payments would be suspended. During this time, interest would be charged to the loan, yet no payment would be required.
- Co-signer Release – Many of the lenders offer a 36 – 48 months co-signer release if payments were on time and the debt to income ratios are above a certain level.
- Auto Default rule – If the loan required a co-signer and the co-signer dies, becomes disable or declares bankruptcy, the lender may have the right to call the loan. This would mean the private student loan would require immediate repayment.
What are the advantages of private student loans?
Private student loans offer some benefits that federal student loans do not offer. A superior student loan repayment benefit is fewer fees. This is especially true when you are comparing them to the Parent Plus alternative.
- If the borrower and co-signer have good credit scores, their interest rate could be more attractive than the Federal rate since the federal rate is a standard rate for everyone.
- The fees are much lower on the private student loans than the Parent Plus loans
- The parent or co-signer can be released from the loan at some point. The Parent Plus loan is legally the parent’s or person who signed for it.
Private Student Loan Summary
We encourage the student borrower to calculate the total net cost of college and not just the one year as listed on the award letter. With this information, a borrower can better project their total debt at graduation. Once a student and family understand these numbers a proper analysis of the loan type can be done. This step is often overlooked and is a major contributing factor to the current debt crisis. If a private loan works for you a great place to start: top private student loan lenders in 2019.
Variable with ACH: 3.28%- 12.59% Fixed with ACH: 4.26% - 13.22%
3.64% – 9.74%
2.87% – 10.75%