Private student loan lenders vary from student loan-only issuers, to major banks, credit unions, and neighborhood savings and loan banks. Private student loans are a great way to finance the excess of your college expenses over and beyond federal student loans and subsidies.
A private student loan is one which is accessed through a bank, and not the government. Thus, private student loans earn their name because they are given by private institutions—those that are owned by individuals, groups of individuals, and otherwise not owned by government. In accessing a private student loan, you have the ability to borrow at lower rates, and with better terms and flexibility to get the loan you need to get the college education you want to have.
Private Student Loans and Interest
One of the best advantages of a private student loan is that it generally comes with a lower rate of interest than you might find in a federal loan. Private student loans are not available to everyone, and as such, private lenders tend to “invest” their money only in students who have the potential to pay it back. The government, on the other hand, lends money to everyone, and everyone who borrows money publicly ultimately pays for the many people who cannot make good on their loans.
Private student loans can be both fixed and adjustable rate. A fixed rate loan is one in which the rate of interest charged to the loan balance does not change. An adjustable rate loan is one in which the rate of interest charged to the loan balance does change. If you have an adjustable rate loan, your monthly payments will rise and fall based on the interest rate. This is not true with a fixed rate loan.
College students usually opt for fixed-rate loans because they are safer, and their cost is known. Here are a few example rates for fixed-rate loans vs. adjustable rate loans:
For a Wells Fargo private student loan, the lowest rate on an adjustable rate loan for 15 years works out to 3.5%. For a fixed-rate loan, however, the rate is 7%.
If we look at those as apples to apples comparisons, the adjustable rate loan looks like a much better deal. However, an adjustable rate loan can rise and fall in interest rates. Right now, rates are at their lowest ever, and 3.5% is unlikely to last for long. When rates rise—an ordinary rate is closer to 5%, which would make student loans cost 8-9%–the person who takes an adjustable rate loan will pay more than the person who takes a fixed-rate loan.
Getting Money from Private Student Loan Lenders
As we said previously, accessing the money you need for college from a private lender is more difficult than from a public lender like the government. A private student loan company will require most college students to:
1. Make $18,000 or more per year.
2. Find a cosigner for the loan or
3. Pay a very high rate of interest on the debt
Making $18,000 per year while in college is no easy feat, especially for full-time students. Finding a cosigner, on the other hand, is usually as easy as asking a parent, grandparent, or someone else you know who can trust you to pay back the loan to also sign on the dotted line. In cosigning a loan, the cosigner is responsible for the payments if you cannot make them yourself.
However, getting a cosigner is a great way to save money on fees and interest. The rates listed above for adjustable and fixed rate loans are available to only the highest quality borrowers. Those with poor credit, no credit, or limited income will have to pay as much as three times the interest to secure a loan from a private lender.
While it is not always the case, a student loan company may take into consideration your future earning power. If you ask for $80,000 in loans over the life of your education to graduate in a field that pays $25,000 per year, it’s unlikely they’ll see you as a safe enough bet to loan you a large sum of money without a cosigner. If, however, you’re looking for a $10,000 loan to complete med school, a private student loan lender is going to have a very hard time turning you down for a loan. Most of this risk for lower-earning fields can be mitigated with a cosigner, and it’s recommended that college students do get a consigner to maximize the likelihood they walk away from the bank with a loan.