Student Loans as a Tool to Pay for College
With the rising cost of a higher education, more and more students are taking out loans each year to help finance it. In fact, 7 out of 10 students who graduated in 2014 had student debt—with the average amount being just under $30,000.
While there are other ways to help pay for education, such as scholarships and grants, these are almost never nearly enough to cover the huge price tag of a college degree. Though it isn’t necessary to attend college to be successful, many jobs that are attractive to young adults require a college degree.
Though many people see student loans as negative, when it comes down to it, they are truly an investment in your future. Having a college degree opens up countless doors that would otherwise be locked to those who only a high school diploma. Many jobs won’t even look at the applications of those without one—no matter how intelligent they may be.
If students are smart about their debt and take their education seriously, they don’t have to be the lifelong burden that so many people try to make them out to be. However, because these loans are a risk, those entering into college should strongly consider there future career options and what major is necessary to obtain that career.
There are many majors and careers that are extremely oversaturated, leaving students with a low chance at obtaining their desired job after graduation. According to Forbes, Computer Science, Economics, Accounting, and Engineering degrees all have the highest rate of job offers. On the Other hand, Anthropology and Archaeology, Video and Photographic Arts, Philosophy, and Religious Studies come in last in terms of job placement.
Under most circumstances, you will have to pay back your educational loans. It is crucial to have a plan on what you will do after college and how you will pay pack your student loans. Thinking about all of this before you even step foot in your freshman dorm will give you a leg up on other borrowers and will put you on track for a (relatively) stress-free repayment process.
It is easy to get caught up in the seemingly countless number of options when it comes to student loans. Though this guide will mainly focus on private student loans, we will first go over how they are different from federal student loans and the basics of each.
Federal Student Loans vs. Private Student Loans
There are two types of educational loans—federal and private. Each of these have their own perks and downfalls but both can help students and their families pay for their higher education. It is important to understand both before determining which is best for you.
Federal student loans are given by the Department of Education. In order to receive these loans, students and their parents must fill out the Free Application for Federal Student Aid, or the FAFSA. This form takes in basic information about the financial situation of families, such as income. Based off of this, the government determines the Expected Family Contribution, or EFC for short.
After the EFC is calculated, the government may offer students grants, scholarships, and/or loans. The lower the EFC, the more likely students are to receive need-based help in the form of scholarships and grants. Everyone who fills out the FAFSA will be offered some type of federal educational loan.
There are two main categories of federal student loans—subsidized and unsubsidized. Students with a low EFC are typically offered subsidized loans. For these, the government pays the accrued interest while the student is in school. This means that the principal will stay the same as long as the borrower is enrolled. The government does not pay the interest on unsubsidized loans, leaving students and their families responsible for paying it. These are typically reserved for families who can afford to contribute more towards tuition payments.
As of early 2016, most federal student loans have an interest rate of 4.29% for undergraduates. This rate is typically lower than what is offered by private lenders. Usually families only turn to private student loans after they have exhausted all of their federal options.
Banks, credit unions, and private lenders all may offer private student loans. The main difference of private student loans is that they are, in most cases, based solely on the credit of the borrower and, if applicable, his or her cosigner. Private lenders perform a credit check to determine if customers are eligible for loans and, if they are, what they’re interest rate is.
In the following sections, we will go over more about how private student loans work, how to apply for them, and some of the top lenders.
What are Private Student Loans?
The amount of private student loans given out each year has skyrocketed in the past decade, as compared to federal student loans. On average in the past decade, private student loan volume has increased by about 30% a year while federal volume has only grown by 8% annually. With these current rates, it is expected that more private loans will be given out than federal loans by 2030.
Private educational loans are available to those pursuing associate’s, undergraduate, graduate, and professional degrees. Borrowers can use the loans for any cost associated with attending college including—but not limited to—tuition, room and board, books, and technology. It is the borrower’s choice to decide how he or she spends the money; so using it only for what is absolutely necessary is essential.
Private Student Loan Interest Rates
Most private lenders offer two types of interest rates—fixed and variable. Fixed rates are considered to be safer as they stay the same over the life of the loan. These rates are usually initially higher than variable interest rates because they do not change over the life of the loan. If you take out a loan with a fixed interest rate of 8%, you will pay 8% over the life of the loan.
Variable interest rates, alternatively, fluctuate with the market. Because loans of this type are more of a gamble for the borrower, the rate is initially lower. Depending on the market, however, they may be higher than fixed rate loans at times.
Interest rates usually start around 2% for extremely qualified borrowers and may go as high as 12% for those with a subpar credit history. Each lender has its own criteria for judging an applicant, however, and there is no common formula that could tell you what your interest rates would be.
Interest rates will also vary based on how long you want to repay your student loan over. The shorter the repayment term, the lower the interest rate, and vice-versa.
Private Student Loan Eligibility
Unfortunately, not everyone is eligible to take on private educational debt. Because eligibility is based off of credit worthiness as opposed to need, many families are offered considerably high interest rates or are denied altogether.
As mentioned before, private lenders run a credit check to determine an applicant’s eligibility. According to CreditCards.com, a credit score is based on five things: payment history, credit utilization, length of credit history, new credit, and credit mix. Out of the five, payment history makes up 35% of the credit score. Someone with a good payment history makes on-time payments towards his or her debt each month—including credit cards, mortgages, and student loans.
Though there are no strict requirements for who is deemed eligible to take on private educational debt, the average credit score is 687 on a scale ranging from 330 to 830. If you are well below the average, you will most likely not qualify.
Lenders may be more willing to work with borrowers with low credit scores or if they have a cosigner with a solid credit history. In the following section, we will go over what a cosigner is and how they can help you get a student loan.
What is a Cosigner?
A cosigner is someone who signs a loan agreement alongside the student. By cosigning, this person is taking on responsibility for the loan if the student cannot repay it. Both the student and his or her cosigner are held accountable for this repayment and both of their credits will be negatively affected if it doesn’t happen.
A cosigner is usually a parent, guardian, other family member, or another trusted adult. Because private educational loans are based on credit, it is important that this person has a good credit score.
Many lenders won’t let a student take on educational debt without a cosigner. Out of all of the private loans given out, 90% of them are co-signed. If you are unable to find someone who is willing or eligible to cosign your loan, check out our guide to student loans without a cosigner.
If you don’t have a cosigner, you may still be eligible for a private educational loan if you meet the following:
- Be a U.S. citizen
- Have a solid credit history, typically 660 or above
- Have a good income, typically at least $25,000 annually
Though meeting the above qualifications may help you obtain an educational loan without a cosigner, nothing is guaranteed. If you lower the amount of money you are asking for, you will be more likely to be approved for a loan without a cosigner.
Lastly, make sure to inform your cosigner their responsibilities and the potential negative results that would happen if both of you have trouble making the payments. Cosigning a student loan is a big deal and isn’t something that should be brushed aside as unimportant.
How to Obtain Private Student Loans
At this point, you should have a general idea of what private student loans are and if you may be eligible or not. If you think you are ready to take on educational debt from a private lender, the next step is to apply!
Applying for private student loans is quite simple, actually. Almost every lender allows its users to apply online through their website—either on a computer or a mobile device. Applications tend to take around 20 minutes and are relatively straightforward.
In order to make the process as manageable as possible, it is smart to have the necessary information and documents ready. This may include personal background information, information about the school you plan to attend, and financial documents like pay stubs or another proof of income.
Furthermore, if you have a cosigner, he or she will need the same information for the application. Typically, cosigners can fill out their part of the application after the student has completed his or hers.
Once you submit the application, the lender will perform a credit pull on you and your cosigner, if you have one. The application and credit check results will be sent to the underwriters who determine your eligibility and the terms of your loan.
Within a few days at most, you will be notified of the results of your application. At this point, you may be required to submit additional information to complete the approval process.
To accept the loan, you will have to sign the promissory note. This is the legally binding contract that requires you to repay your loan and any interest that accumulates. After you sign the promissory note, the funds from your loan will be sent to your school following the certification of the loan.
Paying Back Private Student Loans After Graduation
Though repayment varies with each lender, there are typically four repayment options:
- Deferment – In this case, the borrower makes no payments towards their student loans until after graduation. In this case, usually interest still accumulates. Some lenders do not allow for this option.
- Flat Payment – Borrowers who choose this option will make one flat payment each month while in school. These payments will go towards interest that accrues but will not cover all of it.
- Interest-Only Payments – This option is smart for those who cannot afford to make full payments while in college. In this case, students make payments towards the interest that accrues while they are in school. This will keep the principal balance level. If the accrued interest is not paid, the principal will continue to grow and each subsequent interest charge will be higher.
- Interest and Principal – In this case, payments are made towards both the interest that accumulates as well as the principal. For this option, the principal will continually decrease as payments are made, meaning less interest will also accumulate. Many students are not able to choose this option, as they are too busy with their studies to work a job.
No matter which plan you end up choosing, you will most likely still be paying off your educational debt after graduation. For those that chose the deferment option, there is usually a grace period after graduation in which the borrower doesn’t have to start making payments. Most lenders allow for a grace period of 6 months.
How to Save Money While Repaying Educational Debt
There are a variety of ways you can save money while making your repayment process go as smoothly as possible. It is first important to understand the ins and outs of your loans. This means you should know your monthly payment, interest rates and types, and your length of repayment. It is much harder to successfully repay your debts if you don’t know the basics about them.
Once you know your loans, it is time to come up with a plan on how to pay them back. A smart first step would be to create a budget for yourself. This means you should first write down all of your sources of income. Following this, you should take out any absolutely necessary expenses. These may include rent or mortgage payments, utilities, and food. The next thing to budget for would be any debts you owe. Because these can hurt you financially if you ignore them, they should be prioritized above non-essential things like entertainment or alcohol.
A great to save money during repaying your student loans is to pay more than the minimum amount required. When you do this, you will reduce the total balance of your loan. When you have a smaller balance, less interest is charged to you. If you come across extra money, consider putting it towards your debt, even if it is only a one-time thing.
If you have more than one private student loan or both private and federal student loans, you can save money by paying off your highest interest loans first. Because these loans have higher interest rates, more money will accumulate each month. Pay each of you minimum payments and then take whatever money you have left over and put it towards your most expensive loans.
Another way to save money is to take advantage of interest rate reduction offers. The most common, that nearly every lender offers, is for enrolling in automatic payments. When you do this, not only are you given an interest discount (usually around 0.25%), you also don’t have to worry about making your payment each month. As long as the money is in the account, your servicer will automatically deduct your payment.
The last, but certainly not least, tip is to consider student loan refinancing. When you refinance your student loans, you trade into your old federal and/or private student loans for a new one with different terms. Usually when refinancing, you are given a lower interest rate as compared to your previous loans.
Refinancing is done with a private lender who determines your eligibility based on your creditworthiness. Because many students obtain jobs after graduation and now have a steady stream of income, they are considered to be more trustworthy than they were when first applying. This is why lenders often are able to offer lower interest rates to applicants. To learn more about student loan refinancing, check out our complete guide here.
Who Are Some Private Student Loan Lenders?
There are many places where you can get a private student loan. As mentioned before, many banks and credit unions offer educational loans to their members. Recently, however, many companies have started that just offer private student loans. Here we will go over 3 of the biggest private lenders: College Ave, U-fi, and Citizens Bank.
College Ave Student Loans
College Ave Student Loans is one of the newest student loan lenders in the industry. Founded just last year in 2015, College Ave’s goal is to help students finance their education with no tricks, gimmicks, or surprises. The company works with Liberty Bank, N.A. to fund the private educational loans they offer.
College Ave Student Loans offers a variety of repayment options for their borrowers. Variable rates range from 2.96% to 9.45% while fixed rates range from 5.74% to 11.85%. These are highly competitive rates and, in some cases, may be even lower than federal loans.
There are many benefits of taking on educational debt through College Ave. First off, they don’t charge any fees for applying or paying early. In addition, they have a fast application process and can make a decision based on your credit instantaneously.
College Ave Student Loans lets their borrowers decide between four repayment plans while still in school—full principal and interest, interest only, flat, or deferred. For explanations of these options, see the “Paying Back Student Loans After Graduation” section above.
In addition, College Ave allows its borrowers to choose among 8, 10, 12, and 15 year repayment terms. A shorter term means higher monthly payments but a lower interest rate—meaning you will pay less over the life of your loan. A longer term will allow for lower monthly payments but a higher interest rate. Payments may be more manageable, but you will pay more in the long run.
To apply for a private educational loan through College Ave, simply visit their website on your computer or mobile device. There application is relatively simple and only takes around 15 minutes. If approved, the money will be sent directly to the college you plan to attend. You will be able to access these funds after you set up all of the accounts with your school.
U-fi Student Loans
U-fi Student Loans was built in 2015 on the foundation of NelNet, who has been in the student loan industry for 35 years. U-fi’s mission is to “help students and recent graduates reach their educational goals and make smart financial decisions”. To accomplish this mission, they offer competitive rates, financial resources, and more.
U-fi offers both undergraduate and graduate loans. Loans range from $1,000 to $125,000. Variable range from 3.81% to 8.29% while fixed rates range from 5.52% to 11.76%. It is important to realize that though these minimum rates may be higher than College Ave and other lenders, it does not necessarily mean that U-fi’s offer will not be in line, or even better, than them.
There are also some great benefits of taking out a private loan with U-fi Student Loans. First off, if you are able to maintain a 3.0 GPA, they will give you a 1.5% cash back reward. Furthermore, U-fi will reduce your interest rate by 0.25% for enrolling in automatic payments.
U-fi also has no application, origination, or prepayment fees. Their goal is to help you with financing your education, not to trick you into paying surprise fees. A unique benefit that U-fi offers is the option to release a cosigner after 24 on-time payments. If you are able to prove that you are able to consistently make your payments, U-fi expects you to continue the trend, with or without a cosigner. Releasing your cosigner will allow he or she to free up some credit that could be used towards something else, like a new car or house.
There are three repayment plans that U-fi offers—Immediate Repayment, Interest-Only Repayment, and Deferred Repayment. For the Deferred Repayment option, borrowers aren’t required to start making payments until 6 months after graduation. Finally, U-fi Student Loans offers repayment terms of 5, 10, and 15-years.
To apply for a private loan through U-fi, visit their website here. Like College Ave’s, the application only takes about 15 minutes and can be done completely online.
Citizens Bank Student Loans
Citizens Bank offers a variety of financial services to its members including checking and savings accounts, investing options, small business and commercial loans, and—of course—educational loans.
Citizens Bank offers options to students and directly to parents. For the loan to students, variable rates range from 2.76% to 9.51% and fixed rates range from 5.25% to 11.75%. Loans can range from $1,000 to $175,000.
As is common with other lenders, Citizens Bank charges no application, origination, prepayment, or disbursement fees. In addition, Citizens Bank offers a 0.25% interest deduction for enrolling in automatic payments and another 0.25% reduction for those who are members of Citizens Bank at the time of the loan application.
Like U-fi, Citizens Bank allows borrowers to start paying principal and interest immediately, make interest only payments while in school, or to defer payments until after graduation. Furthermore, Citizens offers 5, 10, and 15-year repayment terms.
To apply for a educational loan through Citizens Bank, simply visit their website here. The application only takes around 20 minutes and your cosigner can fill out their information once you complete yours.
As college becomes more expensive, more students are turning to private student loans to help fund their education. If you have to take out student loans, it is crucial to understand the details of them and to have a plan on how you will pay them back. If you ever fall behind, call your servicer immediately and figure out what you can do to get back on track. Student loans don’t have to be the monster everyone makes them out to be and if you follow the suggestions on this page, they won’t be.