Choosing among private student loans involves a variety of factors: getting the lowest interest rates, whether you want to cosign your student’s loan, payment break options, and career help available for your student.
When your credit is good, you have more options for private student and parent loan approval. Plus, you’ll likely to get better interest rates. The difference in options based on credit scores is the same as what would be if applying for credit cards or a mortgage.
Your first step in comparing student loans is simply applying. If you don’t get approved for the ones you want, don’t be discouraged. Your credit can be boosted in just a few months.
Borrow the amount your student will need for the year. You can always repay loans early if you get approved for a loan with better interest rates or other terms the following semester.
Comparing interest rates is fairly simple. For instance, 3.5 percent is obviously better than a 4.5 percent interest rate.
Just be careful to select a loan that also offers the time frame and payment you need. For instance, $10,000 borrowed for 5 years with a 3.5 percent interest rate has an associated payment of around $180. A 10-year loan with a 4.5 percent has an associated payment of just over $100.
While an $80 difference may seem like a big deal, you may be borrowing for other semesters. That’s why it’s always best to start with an over all budget for how much in student loans your family can afford to borrow.
Level of Responsibility for Parents
When your student borrows private student loans, they don’t have the credit to borrow to pay for college yet. Private lenders are counting on your income and credit to cover payments if your student doesn’t.
Thus, you have to decide the level of responsibility you want to take on. The two types of private student loans are ones that are issued to students and ones that are issued directly to parents.
For private parent loans, you will have your name on the loan and have full legal responsibility. You can never transfer the loan to your student.
For private student loans, you and your student are essentially co-borrowers of the loan. BUT you can remove your name from the loan after the student completes a specified number of on-time payments and gains their own credit worthiness. Time frames for removal differ by lender and range from 12 to 24 on-time payments.
Call lenders before officially borrowing the money to see what their rules are for removing cosigners.
Payment breaks during economic difficulty
Federal student loans offer payment breaks called forbearance and deferment. Private student loan lenders do the same. The difference is private student loan lenders can differ in the amount and reason they offer temporary breaks from making payments.
For instance, one lender may offer forbearance when a student is unemployed. Another may take into consideration the income and finances of the cosigner. Ask lenders where their rules are listed in writing when you’re compare options.
Special perks for students
A relatively new trend is for private lenders to offer programs such as help finding a job. Before selecting a lender for this reason, ask how they help with the job search and if they do have contacts in the cities and career fields your student is interested in.
- Choosing the best private student loan for you is about much more than the interest rate.
- If your credit isn’t great, borrow what you need to at the interest rate you are approved for. Then, reapply for a loan with a better interest rate the next semester after working to improve your credit. You can always partially pay off the first loan early.
- Affordability can be more important than the interest rate. You may choose a loan with a slightly higher interest rate that gives you more time to pay it off.
- When choosing between parent and private student loan options, consider whether you want to be responsible for the loan long term. Private student loans may offer options for your name to be removed from the loan after 12 to 24 months of on-time payments.
- Call the lender to find out about rules beyond interest rates to fully understand what you are signing up for.