Private student loans are completely unlike federal loans for college in so far as how you qualify for them.
They are not based on need; they are based on credit. Your credit history has to be good and well-established or you will need to have a cosigner with a good credit rating.
If your credit rating (FICO score)
is less than 700, you will need a cosigner. But, if you do not have one with a better score than yours, forget about applying for private student loans.
So, before you start filling out applications, you should have the answer to this question:
"What’s your Credit Score?"
Reputable lending companies generally expect their student applicants to have either a great credit score or a cosigner with a very good one. And, watch out for advertisements like...
"Student Loans, No Cosigner!"
These are usually scams. In most cases, you'll be denied a loan, but they will try to sell you all kinds of services such as credit repair or credit cards.
In today's loan environment, a slogan like, "bad credit college loans" targets a student who has a credit score of 650-680. If that describes you, you may be one of the lucky 5-15% of those who apply and actually gets accepted with that score. These few individuals are given the privilege of paying around a 14% rate with 12% fees.
Researching interest rates and borrower benefits for all the different private loans for college that are available will take a lot of time and effort. Or you can fill out one form to see what competing lenders can offer you.
If you've maxed out your federal student loans, see if state college loans are available in your state. Some states partner with banks and credit unions to offer reasonable terms for private student loans.
When you apply to different lenders to compare terms, each one will pull a credit report, so try to fill out the applications fairly close together so that credit reporting agencies will recognize that you are 'shopping around'.
What can you expect from Alternative Student Loans?
Most private student loans have variable rates. This means that whatever the actual interest rate is when you sign the note, it is likely to be different when you start paying off the loan. Typically, this variable rate is either tied to the Prime Rate or to the LIBOR (London InterBank Offered Rate).
Whatever rate is advertised ("as low as...") is the rate that is offered to borrowers (and cosigners) with the best credit- usually a 790+ FICO. This is an example of rates offered by reputable commercial lenders:
LIBOR+2.00% to LIBOR+11.00%
0% to 12%
Prime-0.5% to Prime+7.9%
0% to 9%
*COA-aid is the cost of attendance minus whatever aid the student receives
As you can see, lenders choose whatever rate they feel your credit qualifies you for. But check to see which private loan lender offers the best range of interest rates.
Like any other loan these days, applying is virtually an automatic process. It has to be so that companies can advertise
"fast college loans"
So how do you regain some control over the process? By looking at terms other than interest rates. Many lenders offer borrower incentives with different:
deferment and forbearance terms
interest rate reductions for auto-pay
interest rate reductions for a number of on-time payments
cosigner terms (such as elimination of the cosigner from the note after a number of payments)
Have a good idea of what type of job you will be getting after college and know that your salary will be higher after a year?- Look for a 12 month deferment before repaying.
Going into a field where it takes a long time to achieve a good salary?- Try easy forbearance terms.
Want to attend college part time while you are working?- Pick a loan with no full-time enrollment requirement.
Does a reluctant cosigner need persuading?- Maybe they'll prefer being tied down for 48 months, rather than twenty years.
Absolutely sure you can make payments?- Choose auto-pay and on-time even if the initial rate might be higher.
Starting Feb. 14, 2010, all applicants for any type of private education loan will be required to fill out and sign this self-certification form.
New bills have been introduced in the House and the Senate that would reverse a 2005 law, which made it almost impossible to discharge privately funded student loans in bankruptcy.*
Voice your support for these measures by contacting your lawmakers.
Private Student Loans Help
The Consumer Financial Protection Bureau website** is now taking complaints from borrowers about their private lenders. While not promising any direct involvement, they will bring your complaint to the attention of the company and update you with notifications about your status. It's a start.