Best Private Student Loans of December 2021

Whether your college plans involve heading to campus or logging on for online learning, one thing is certain: You will need a way to pay. Although federal student loans are often the most affordable way to borrow, they may not be enough to cover all of your college costs. Private student loans, as well as grants and work-study programs, can cover the gap between what you need and how much you can afford to pay toward your college expenses.

But be cautious about borrowing too much. “With so much uncertainty regarding college campuses and fall class schedules, planning for expenses is not an easy task,” says Bruce McClary, vice president of marketing for the National Foundation for Credit Counseling and U.S. News contributor.

This guide can help you navigate the uncertain school year. What you’ll learn here:

The Best Private Student Loans of 2021

Because each student has unique financial aid needs, no single lender is a good choice for everyone. These lenders are a good starting point for your private student loan research.

U.S. News Survey: 71.6% of Respondents Would Make Different Student Loan Borrowing Decisions If They Did It Again

How Can Students Maximize Federal and Free Financial Aid?

Before you consider private student loans, try to make the most of federal and free financial aid, including private scholarships.

You may be eligible for federal direct unsubsidized loans, but there are limits on how much you can borrow each academic year and overall. Limits range from $5,500 for dependent undergraduate students to $20,500 for graduate or professional students.

“Your first step in financing your education is to submit a Free Application for Federal Student Aid, commonly called a FAFSA,” says Jay S. Fleischman, a lawyer who advises student loan borrowers on effective repayment strategies.

Even if you don’t think you’ll need financial assistance, or think you won’t qualify, submit a FAFSA. The FAFSA is the key to most financial aid.

It’s a requirement for the student financial assistance programs authorized under Title IV of the Higher Education Act, including federal loans, grants and work-study programs. These do not have income or GPA cutoffs, which are common myths.

Although it’s primarily used for federal aid, the FAFSA is often necessary for other forms of assistance. “Many states and colleges use your FAFSA information to determine your eligibility for state and school aid,” Fleischman says.

How Do Private Student Loans Work?

Unlike federal student loans, private student loans do not offer standard options and interest rates. Your credit, and that of a co-signer if you have one, will affect what types of loans you qualify for and the interest rate you’ll receive.

Loan Types

Private lenders may offer different types of loans, depending on the degree you’re pursuing. The loan type can affect your loan amount, interest rate and repayment terms.

Loan Terms

The loan term is the length of the loan’s repayment period, which could range from five to 20 years for private student loans. Typically, shorter loans have higher monthly payments, lower interest rates and lower total costs. Longer loans have lower monthly payments but higher interest rates and higher total costs.

Loan Limits

Loan minimums: Most lenders have minimum amounts you can borrow, which may vary based on your state. Because the minimum could be as low as $1,000, a private student loan may not be the best option if you only need a few hundred dollars for, say, books.

Loan maximums: Lenders can have several limits that affect how much you can borrow. There could be a maximum annual amount you can borrow. Or there could be a maximum combined private and federal student loan amount you must be under to qualify for a loan.

You may also be limited to borrowing up to your school’s certified cost of attendance. The maximum loan limits may be higher if you’re going to graduate, professional or medical school, reflecting potentially higher costs compared with undergraduate programs.

Interest Rate Types

Lenders offer student loans with either fixed or adjustable interest rates. You may not be able to switch your interest rate type after taking out a loan, so carefully consider your options before deciding.

When you’re comparing student loans from different lenders, look at the annual percentage rate, or APR, rather than the interest rate. The APR is your total cost of borrowing each year.

Fixed-rate loans. With a fixed-rate private student loan, your interest rate is set when you take out the loan, and it won’t change. The rate you lock in can depend on market rates, as well as your lender, your credit and your loan’s terms.

“In general, a fixed-rate loan is a better long-term option for financing your education,” Fleischman says. “You are able to plan for future payments without worrying that interest rates may increase payments faster than your income increases.”

Variable-rate loans. The same factors that may determine your interest rate with a fixed-rate private student loan can affect your initial interest rate when you take out a variable-rate loan. But with a variable-rate loan, your interest rate may rise or fall over the life of the loan.

Interest rates for variable-rate loans are tied to an index, such as the prime rate. The lender adds a margin to the index to determine your total interest rate. There may be a limit to how high or low your interest rate can go.

Variable-rate student loans tend to start with a lower initial interest rate than fixed-rate loans and could remain lower. However, you’re taking on risk because the loan’s interest rate could rise, causing your monthly payment and total cost of borrowing to increase.

A variable-rate loan may be best for those who can quickly repay the loan, which will limit your risk, or for those who can afford higher monthly payments if the interest rate increases.

What Are the Drawbacks of Private Student Loans?

Private loans can help students fill gaps in funding. Yet private student loans have drawbacks compared with federal student loans. These include:

Credit-based eligibility. Private student loan terms will depend on the applicant’s credit. Without a creditworthy co-signer, many students may not be able to get approved or may only qualify for a high interest rate.

Risk for co-signers. Co-signers take on debt and risk when they add their names to private student loans. If the student can’t make payments, this can hurt the co-signer’s credit.

In some cases, the co-signer will be responsible for the debt if the student dies or is permanently disabled.

Potentially higher interest rates. Private student loans do not always offer lower interest rates than federal student loans.

Interest rate accrual. With subsidized federal loans, the government will pay the interest while you’re in school and when the loans are in deferment. With private student loans, you’ll accrue interest during these periods.

No guaranteed hardship options. “The difference between unsubsidized loans and private loans is deeper than the accrual of interest,” Fleischman says. “Unsubsidized loans come with federally mandated periods of in-school deferment, forbearance opportunities and a variety of income-driven repayment options.”

Some private student loan lenders offer deferment or forbearance options, but they might not be as lenient or as lengthy as your options with federal student loans.

No federal forgiveness programs. Several federal student loan forgiveness and cancellation programs aren’t available with private student loans. However, private student loans may be eligible for other hardship programs, including coronavirus relief.

Shorter default period and little recourse. If you default on a private student loan, the entire loan balance becomes due immediately. Federal student loans default after 270 days of nonpayment, and when they do, you may have several options for getting your loans out of default.

Private student loans can default after one missed payment. You may be able to repay the late balance and bring the account current before the lender charges it off, often around four to six months, depending on the lender. But federal student loan programs can be much more forgiving.

How Can You Choose the Best Private Student Loan?

Focus on four keys areas when comparing private student lenders, according to the Federal Trade Commission, the Consumer Financial Protection Bureau, the Department of Education and countless consumer reviews:

Products

Once you’ve determined the type of student loan you’ll need and how much you want to borrow, check to see that the lenders’ offerings match your requirements. You can then compare their loan terms and limits to narrow down your list. For example, make sure each lender offers financing for your degree type.

Eligibility Requirements

Research lender eligibility criteria, such as citizenship, enrollment status, income and credit history. You should make sure you’re likely to qualify for a student loan before you apply.

Student loan eligibility requirements typically include:

Costs

The cost of your private student loan will depend on a variety of factors, including the interest rate and the type of interest you choose. Look closely at fees to calculate how they’ll affect your total cost of borrowing.

Some lenders provide preapprovals, which will give you an estimated interest rate without hurting your credit. It’s worth getting a preapproval if that’s an option, as you can reliably find out the interest rate a lender will offer you.

Lenders often have fees for applying for or originating loans. Not all lenders charge these, but you should always read the loan terms closely to identify potential fees, such as the:

Interest capitalization isn’t a fee, but it occurs when unpaid interest is added to the principal of your student loan. How and when your interest is capitalized will influence your loan’s total cost.

Some lenders let you forgo loan payments during school and for the first several months after graduation. Interest accrues on your loan principal, and when your interest capitalizes, your principal increases. As a result, you’ll accrue more interest each month.

Interest capitalization also happens if you stop making payments but will continue to accrue interest in the future, such as when you put your loans into deferment.

One thing you don’t have to worry about with student loans are prepayment penalties. Unlike some other types of loans, such as mortgages or personal loans, student loans do not charge borrowers fees for early repayment.

Additional Features

The fine print of private student loans can vary from one lender to another. Some features or benefits could make repayment easier, lower your interest rate, or help you choose the right lender for your needs.

Here are some of those features and benefits:

Co-signer release. A lender may release a co-signer from a loan after the student makes a series of on-time payments and if the student qualifies to take on the loan.

How Can You Get a Private Student Loan?

You’ll take several major steps to obtain a student loan. When you apply, you’ll need to meet eligibility requirements, provide documentation, and go through processing before approval and disbursement.

1. Eligibility: The lender will check basic eligibility for the loan, including citizenship and enrollment status. With further documentation, your income, credit history and other eligibility factors will be verified.

2. Required documentation: You’ll need to provide personal and financial information when you apply for a private student loan. Organizing your documents could make this process easier.

Lenders may need this information for the borrower:

3. Processing: Many private student loan lenders let you apply online. You may receive a decision within a few minutes, after the lender analyzes your credit and other eligibility criteria. You may need to submit additional supporting documents or information if the lender has questions.

4. Approval and disbursement: Once you’re approved for a private student loan, you can then choose the interest rate type, the repayment plan and the other loan terms, and then sign the loan agreement.

The lender will contact your school to verify that you’re eligible for the loan amount you requested. The school could take two to five weeks to respond to the lender, and then it schedules disbursement dates and amounts for the loan.

Private student loans will be sent directly to the school. If your loan amount exceeds what you owe the school for that semester, you may receive a refund for the difference. You could return it to the lender, reducing what your debt, or you could spend the money on education-related expenses, such as room, board or books.

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