Paying for college has a lot of steps. FAFSA? Check. Financial aid award letter? Check. Enough funds to pay for tuition costs? Nope. Sometimes you don’t get all the money you need to pay for school. Private student loans can be a good way to help pay your tuition bill.
You might think you’re totally ready to apply for a private student loan. Before you do, you should review the steps outlined below to make sure you don’t miss anything. Here’s how to apply for private student loans.
10 crucial steps to take when you apply for private student loans
Applying for private student loans isn’t hard, but it should be done with diligence. You want to make sure the debt you’re taking on is something you actually need and can handle financially.
1. Use scholarships and grants first
Let’s first address the most important step: using scholarships and grants first. This is literally free money to help you pay for school. Make sure you’ve applied for all the scholarships offered at your school and even a few from outside sources before taking out student loans.
2. Choose federal student loans next
Next, you need to make an important choice: federal student loans vs. private student loans. The general rule of thumb is to take out federal student loans before taking out private student loans.
Federal student loans are preferable to private student loans because they offer more borrower benefits. This includes being eligible for student loan forgiveness, a guaranteed grace period, and income-driven repayment plans. Even if you’re not sure about needing these benefits, its best to have them in your back pocket.
Like with any rule, there are instances when it might need to be broken. The only time you may want to take out a private student loan over a federal student loan is in the case of Direct PLUS Loans. Direct PLUS Loans carry a high interest rate and don’t have a grace period. If you have good credit and can afford the payments, this is a situation to break the rule and look at private student loans, especially since you can probably find a better rate elsewhere.
3. Calculate exactly how much you need
You can be approved for the cost of attendance (COA) with your private student loans. That said, you only want to take out as much as you need as most private student loans require that you pay them back right away.
To calculate how much you need, you’ll need to run the numbers of your total COA. This typically includes tuition, fees, books, supplies and housing.
You should be able to see this on your award letter or online with your financial aid account. If not, call your school to get the total cost estimate. You can do so by semester or year, depending on where you need to fill the gap with a private student loan.
Once you have the total, subtract the following:
- Scholarships and grants
- Federal student loans
- Work-study if you qualify
- Your own contributions if you’re employed
- Your family contributions if applicable
After you subtract these items from the total COA, you’ll be left with the amount you need to apply for with a private student loan.
4. Find private student loan lenders
You know how much you need to borrow. Use this amount to start looking into private student loan lenders.
Private student loan lenders can be credit unions, banks or financial institutions. When you start shopping for private student loans, the number of lenders can be overwhelming. There are two guidelines to keep in mind as you look:
- Never go with the first one or two lenders you see. There will be a lot of ads that show up when you first Google search private student loans, and this can derail you. Avoid the ads. An easy place to start is a website like Credible, which allows you to compare multiple lenders at one time.
- Go through the pre-approval process to check your rate. Using a pre-approval to get a rate and loan terms won’t hurt your credit, as only a soft credit pull is used for this. It’s important that you look at your loan terms with different lenders so you can truly compare.
Keeping these two things in mind, look for lenders that cater to you in every way possible. There are private student loan lenders like Laurel Road that focus on medical professionals and residents. Others like Common Bond have both a social mission and unemployment protection. See a comprehensive list of lenders in our Complete List of Private Lenders for 2019.
5. Compare private student loan offers
Once you have a list of lenders, compare the loan terms. When you check your rate, you’re going to look for:
- Interest rate: You want the lowest interest rate possible. Also decide if you want a fixed or variable interest rate.
- Length of the loan: The length of the loan, or repayment term, is how long you’ll be making payments before your balance hits zero. The longer the repayment term, the more you’ll pay in interest. At the same time, your monthly student loan payment would be smaller compared to a shorter repayment term.
- Repayment plans: Depending on the lender, you may not have to enter an immediate repayment plan. Some lenders offer interest-only payments for a period of time or deferment while in school. Look into these options as you compare loan terms.
- Perks and bonuses: See if you can find a referral bonus with a private student loan. This could be a cash bonus. You may also get an interest rate discount if you already have a relationship with the lender. This final factor should be weighed less than the factors above.
You need to be able to afford your monthly payments. You also may not want to be paying off the loan for 15 years. Find an ideal balance that fits your financial needs.
6. Read eligibility requirements
While you research and compare private student loan lenders, you need to check the eligibility criteria. There are general eligibility criteria for private student loan lenders.
Typically, you must be:
- Enrolled in an eligible school program. Most lenders require at least half-time enrollment
- A U.S. Citizen
- At least 18 years old
You must also use the funds for your school. You can expect your lender to verify your school information.
An especially important eligibility requirement is your credit and income. Having a good credit score means you’ll get a better interest rate. You can get a free credit report from AnnualCreditReport.com.
7. Decide if you need a cosigner
If you notice your credit score is low or you don’t have credit history, you’ll need a cosigner. It’s rare to find a lender who will work with you without a cosigner if you don’t have strong credit. You can ask a parent or even a family friend to cosign your student loan.
The cosigner is responsible for the loan if you don’t make payments. Be careful entering into this agreement without being financially prepared. Not managing your loan responsibly can drop your cosigner’s credit score and strain your relationship.
8. Get your documents together
You’re getting close! You know how much you need. You’ve found the lender and the loan terms you want. You’ve made sure you were eligible and decided if you needed a cosigner. Now you need to get your documents in order to apply for the private student loan.
Generally, you’ll need to provide:
- Your Social Security number
- Your contact information
- Proof of income, like a tax return
- Any assets you may have
- Your monthly expenses, including rent or a mortgage
- Your employment information
Keep all of these documents together and start the application for your private student loan.
9. Apply for your private student loan
If you completed pre-approval rate checks, you might have a link sitting in your inbox to complete the application. But you can always start over and apply for the loan directly on the website.
If you need a cosigner, they should be there to apply with you.
When you apply for a private student loan, the lender will check your credit score. You can apply for more than one loan, but keep in mind that this will affect your score. If the lender needs more information from you, they’ll reach out.
10. Finally, accept the private student loan
If you’re approved, you’ll need to accept the private student loan. You can review the loan and sign the loan terms. Your school will certify the loan amount before it’s applied to your account.
It’s a good idea to call your financial aid office, just to make sure it’s in the loop on the loan coming in.
Also note that you can only cancel your loan before it’s disbursed, not after.
Now you know how to apply for private student loans so you can start thinking about your classes. Don’t forget to manage your private student loans while in school.
Beginning repayment on your private student loans
Getting a private student loan can relieve you from having to pay a huge tuition bill. Still, you’ll need to stay on top of your student loans. While federal student loans don’t have to be repaid while you’re in school, you’ll most likely be paying your private student loans back right away.
Stay in contact with your lender. Set up automatic payments so you don’t miss any by accident. Making on-time payments in full will help build your credit score, too. Managing all of your student loans is essential for your current and future financial health.