9 Essential Steps to Take Before Choosing a Private Student Loan

College is expensive. That’s hardly a surprise, but as tuition has climbed and incomes have stagnated, the average net price of a four-year public college has grown to about a quarter of a typical household’s income.

That’s why relatively few students can afford to go to college without financial aid — and why even after grants and federal student loans are used, some still have large gaps to fill. Each year, about a million students seek private student loans as an alternative to bridge those gaps.

Private student loans have gotten a bad rap, and for good reason — they’re expensive and have strict, narrow repayment plans. But for some, it’s the only way to pay for college.

If going down the private loan route is the only way to get through college, follow these steps before you borrow.

1. Crunch the numbers to determine how much you need to borrow

Borrowing for college can be a smart investment if done responsibly. Data from the U.S. Bureau of Labor Statistics shows that those with a bachelor’s degree earn about two-thirds more on a weekly basis than those with just a high school diploma, and they also had a lower unemployment rate.

To borrow responsibly, you first have to calculate exactly how much you’ll owe in tuition, living expenses, books and other miscellaneous fees.

If you’re just researching colleges, you can use each institution’s net price calculator to get an estimate of how much you’d have to borrow to attend.

But if you’re applying to colleges, you’ll want to make sure you fill out the Free Application for Federal Student Aid (FAFSA). The FAFSA is required to be considered for federal grants as well as many state scholarships, neither of which have to be paid back. But the form is also required to access federal loans, officially called Direct subsidized and Direct unsubsidized loans.

Colleges will use information from your FAFSA (and sometimes another form called the CSS Profile) to determine how much financial aid you’ll receive. Once you’re accepted, you’ll get an award letter, which outlines the cost of attendance, like tuition, fees, room and board, alongside any financial aid you’re eligible for. Whatever amount is left over after scholarships and grants are subtracted is how much you’ll have to pay with savings, current income or student loans. This is when you can get an idea around how much you may need to borrow.

Part of crunching the numbers is thinking about your exit strategy or how you plan on repaying your debt. Start by comparing your field of study’s average starting salary against how much you’ll need to borrow to graduate. In general, experts recommend your total amount borrowed stays under what you expect your starting salary to be. (See more about planning for repayment below.)

2. Max out federal financial aid

Nearly every financial aid expert will tell you to max out federal financial aid before you apply for a private student loan.

As previously mentioned, the FAFSA determines your eligibility for different types of federal and state-level aid, including federal student loans offered by the U.S. Department of Education. Unlike private loans, which require you to pass a credit check or apply with a co-signer, federal student loans can be accessed by almost any student who is a U.S. citizen and is in good academic standing.

The loans are automatically deferred while you’re in school, as long as you’re enrolled at least half-time, and they offer flexible repayment programs — something that’s out of the question with a private student loan.

Federal loans also have fixed interest rates and if they are subsidized, the Department of Education will take care of paying the interest while you’re in school. They have annual loan limits of $5,500 to $12,500, depending on your school year and dependency status.

If you need more than that, you can explore Parent PLUS loans. Parent PLUS loans can be taken out for the full costs of attendance and also offer fixed interest rates and no required payments while the student is in school. But since the loan will be issued under the parent’s name, they must pass a simple credit check to get the loan. They are also more expensive than undergraduate loans, so parents with strong credit and income should compare them directly with private education loans.

3. Line up a cosigner

Unlike federal loans, which don’t require you to pass a credit check, private loans are based on the borrower’s creditworthiness.

To qualify for a private loan and get the lowest interest rates possible, you must have an excellent credit history and a steady source of income — something that’s practically impossible if you just graduated high school or are still studying full-time. This is why over 90% of undergraduate private student loans are cosigned.

A cosigner doesn’t have to be a parent. It can be a relative, a family friend or basically anyone you know who’s willing to lend you their credit to increase your chances of approval. But there’s a catch: If someone agrees to cosign your loan, they are equally responsible for your debt.

This means that if you can’t repay your loan once you graduate or drop out of school, they will have to make up for the missed payments. Additionally, their credit score and ability to borrow could be impacted, so it’s important to keep this in mind when asking someone to be your cosigner.

4. Check out multiple lenders and compare differences in what you’re offered

You may have heard of major lenders like Sallie Mae or Discover Student Loans, but there are several financial institutions that offer private education loans, including banks and credit unions, plus newer online lenders like SoFi and College Ave.

Private student loans are not one-size-fits-all. Just because you know someone who applied with a certain lender and had a positive experience or you received an offer in your inbox, that doesn’t mean it’s the right fit for you. So it’s crucial to get a few interest rate quotes to make sure you’re getting the best deal you can. You should also compare different lenders’ loan terms, fees and borrower perks so you fully understand your student loan options.

You can talk with your college’s financial aid office to see if they have a preferred list of lenders that they usually work with. But don’t stop there; you should also use an online marketplace, such as Credible or LendKey, to compare multiple loan offers you may qualify for (you only need to fill out a single application). You can also consult our list of best student loans.

When comparing loan offers, make sure to aim for lenders that offer pre-qualification. This will allow you to compare offers without affecting your credit.

5. Understand how interest will add to the total cost

Interest rates for private student loans can be fixed or variable. Just like with federal loans, if you choose a private student loan with a fixed interest rate, it will remain the same throughout the life of the loan.

However, while all borrowers with federal student loans get the same rate – it’s 5.5% for undergraduate students in the upcoming school year – fixed interest rates for private student loans currently range from about 4% to 16%, depending on your credit and the lender.

Variable interest rates, which fluctuate based on market conditions, currently range from about 5% to 16%, depending on the lender. Note that only borrowers with very strong credit qualify for the lower interest rates.

Interest on all private loans will start accruing right away. If you don’t plan to make any payments while you’re enrolled, this will add to your total indebtedness when you graduate.

When comparing lenders, look at the annual percentage rate (APR) of the loan instead of just looking at the interest rate. The APR of the loan is the figure that represents the true cost of borrowing. It includes the interest rate in addition to any lender fees. (While private student loan lenders don’t usually charge origination fees, it’s still always a good idea to look for the APR.)

6. Ask about repayment terms and benefits

With federal student loans, repayment usually begins six months after you graduate or drop below half-time enrollment, and there are four different types of repayment plans that can reduce your monthly bill by tying it to how much you earn.

Private student loan payments technically start as soon as the loan is issued, though most lenders offer options for in-school deferrals. Private loans are more strict when it comes to the types of repayment they offer. Most offer a few set terms, ranging from five years to 20 years of payments after you graduate.

One other important difference? With federal student loans, you can change your repayment plan for free any time you’d like. But with private student loans, you may have to refinance into a new loan to get a different term.

Before you borrow, ask the lender about their different repayment options and if there are any grace periods, internship deferments or special hardship programs in case you’re not able to secure a job right after you graduate and struggle to pay your student loan. Ask about the forbearance policy as well so you’re not surprised later on if you need to pause your payments.

Finally, make sure you know whether they offer a cosigner release and what the requirements are to qualify. Consider any borrower benefits, like discounts for enrolling in automatic payments and rewards for graduating from the same degree program you requested the funds for.

7. Make a payment plan

Before you borrow, you want to map out your future monthly payments to make sure you can actually afford them.

The easiest way to do this is to pick a repayment term and plug it, plus the amount you’re borrowing and the interest rate you qualify for, into a loan repayment calculator online. These typically show you exactly what you’ll owe each month until the debt is paid off, and they can be very helpful in visualizing how quickly student loan interest can add up. If it seems like an unmanageable amount, then you should think about ways to reduce how much you’re borrowing, even if it means attending a more affordable school.

8. Gather all your info

It can take a lender a couple of weeks and up to a month to process your loan application and disburse the funds. To make sure that the process is as smooth as possible, gather all of the necessary information beforehand.

You’ll need your Social Security number, permanent address and date of birth, a form from the school that details how much you’ll need to cover all of the costs of attendance, and proof of income (if applicable), which can be in the form of pay stubs or bank statements.

You will also have to provide your school’s name and address, field of study, the academic term for which you’re requesting the loan (full year, one semester, trimester, etc.), and expected graduation date.

In some cases, you’ll be asked to provide two or three personal references that can vouch for your character. If you’re applying with a cosigner, you’ll also have to provide their personal details and signature, along with their financial information and any supporting paperwork that can verify it.

9. Use your spare cash wisely

Many students don’t pay anything on their loans while in school, in part because they simply can’t afford it. But if you do get any extra money, you should use it to pay down interest.

When you have a private loan or a federal unsubsidized loan, the interest accrued will be capitalized after you graduate and the grace period (aka the time you have before payments are required) ends. This means that it will become part of the principal balance, and you will have to pay interest on that amount as well. But since private loans tend to carry much higher interest rates than federal loans, you should prioritize paying those first to make your debt more manageable once you graduate. If you can manage making interest-only payments while you’re in school, it could save you hundreds, or even thousands, of dollars in the long run.

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