The majority of student loans in the United States – about 93% of an estimated total debt of $1.7 trillion – are federal, according to a 2021 study MeasureOne report. Although it is more common for students to take out federal student loans, private loans are still a good option. For some, they may even be the only option.
Although there are very specific federal student loans available from the US Department of Education, private student loans are not that straightforward. Private student loans are offered by a variety of financial institutions such as banks, credit unions or other agencies. And each may have different requirements, rates and fees.
There are several factors to consider, starting with the type of interest rate offered by each lender (private student loans can have fixed or variable rates). Find out what rates you can get today!
Read on to learn more about why and when you might need to take out a private student loan – and some of the pros and cons of having one.
When to take out a private student loan
In general, you should maximize your federal student aid (if you have any) before taking out a loan from a private lender. Once you’ve done that, you can start your research.
You will probably want to turn to a private student lender if your Free Application for Federal Student Aid (FAFSA) application has been rejected, you are ineligible for financial aidyou haven’t received enough help or you need funding for other education expenses.
Here are three more reasons why you might want to get a private student loan.
1. You need to borrow more
If you are out of financial aid or simply need more money for an unexpected expense, a private student loan may be just what you need. Private lenders will often be able to offer larger loan amounts, particularly if you have a good credit history and demonstrate why you need it. According to the Consumer Financial Protection Bureau.
Just be sure to carefully review what each lender offers and the different rules they have.
With federal student loans, undergraduates can borrow up to $12,500 per year and graduate or professional students have limits of up to $20,500. according to federal student aid. The maximum amount depends on your rank, dependent status and other factors. Your FAFSA form should contain more details about loan limits. If you have further questions about borrowing restrictions or the like, contact your school’s financial aid office for assistance.
Some private lenders, on the other hand, offer maximum loan amounts of up to $100,000 or more. Again, loan limits and other rules and restrictions vary by lender. Your (or your co-signer’s) credit history, income, and savings can also play a role in your borrowing limit. This is especially important if you are attending an expensive university and need more help.
Before applying for any type of loan, be sure to calculate the numbers. Sallie Mae recommends costing your tuition and other expenses and only borrowing what you need.
“Some lenders require the school to approve or certify your private student loan amount to help you avoid borrowing more than you need. This is a good idea. Only borrow for tuition and related expenses so that your payments are manageable when you finish school.”, Sallie Mae states on her website.
2. You need money fast
Although you still need to prepare several documents and financial information, the loan application process for a private lender may not take as long as filling out and submitting a FAFSA form. So, if you are looking for a last minute loan, contact a private lender.
Once the FAFSA form is submitted, it must be carefully reviewed by the U.S. Department of Education, which may take three to five business days (maybe longer if there are errors, corrections, or signatures needed ), then it is forwarded to your school for further review and approval. Remember, this is the most common type of student loan, so there are a lot of applications to screen. Depending on the type of loan, the school and the application, obtaining a federal loan can take several weeks or several months.
If you are borrowing for the first time in your first year of study, you may also have to wait at least 30 days after the first day of the start of your semester to obtain the funds.
There is no guaranteed time frame for your private student loan funds to arrive in your account, but it usually takes around two to 10 weeks. However, you can get it even faster if you (or your co-signer) have a strong credit history and a stable income. Additionally, some private lenders will even send money to you directly instead of going through your school – just be sure to check with the private lender and your school’s financial aid office to understand their process.
3. You have expenses that federal loans won’t cover
Students who have exhausted all of their federal student loan options often turn to a private student loan or personal loan to help them financially. Most international students are also not eligible for federal student aid – but there are some exceptionsdepending on your situation.
Federal loans cover many expenses, from tuition to transportation and living costs. But as mentioned above, there are limits to how much you can borrow. If you don’t want to choose or need more money for education expenses not covered by federal loans, you may consider a private student loan.
Things to consider before taking out a private loan
It is always wise to follow expert advice when it comes to borrowing money. And most agree that you should always look into federal student loan options first, as they tend to offer more benefits and protections overall than private student loans.
Here are some other advantages of federal student loans, by federal student aid:
- Eligibility for Student Loan Forgiveness
- Fixed interest rates
- No credit check or co-signer is necessarily required
- A variety of repayment options
- Loan Consolidation Options
- No prepayment penalties
If you need a little extra cash and have exhausted your federal student loan, you may also consideror do research . You can also contact a school counselor to review your options. Perhaps there is a scholarship or grant that you are eligible for that could also help you improve your financial situation.