- Definition: A private student loan is a non-federal loan used for education related expenses. It may be recommended once individuals have already exhausted other forms of free and federal financial aid. These loans are typically based on a strong credit history and verifiable proof of income or employment history.
Private Student Loan
Private Student Loans Can:
- Be a low-interest student loan option for both students and parents
- Help pay for undergraduate, graduate school, and professional degrees, as well as career training
- Help you meet the total cost of your education
- Supplement your other financial aid when you need it most
- Cover any education-related expense, including books and computers
- Aid in building your credit — especially with a creditworthy cosigner
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Common Names for Private Student Loans
There are a number of popular private student loan names you may see and hear over time, and it is bound to be confusing. Sometimes the names will be generic, and other times the name will refer to a specific lender’s program or brand name. Keep in mind that the name of the student loan program is not as critical as an understanding of how the particular loan terms work, or how they may impact you. To give you a quick primer on some of the most popular private student loan names you may encounter, see the list below:
- Undergraduate Loans (typically used for those seeking bachelor’s or associate degrees)
- Graduate Loans (for graduate students pursuing masters and doctorate degrees)
- Law Loans (for graduate students enrolled in a law school)
- Bar Exam Loans (used by bar exam candidates to cover the cost of bar study preparation)
- MBA Loans (a special name for graduate loans for students pursuing an MBA in business school)
- Health Professions Loans (used by graduate students of allopathy, osteopathy, dentistry, nursing, optometry, pharmacy, veterinary medicine, and other health professions)
- Residency Loans (post-graduate medical residents are eligible)
- Smart Option Student Loan® (a Sallie Mae program name)
- PNC Solution Loan® (a loan program offered by PNC Bank)
- Custom Choice Loan® (SunTrust Bank’s loan program)
- MedCAP® Alternative Loan (offered by Wells Fargo)
- MedCAP-XTRA® (a Wells Fargo program name)
- Student Loans for Parents
Facts About Private Student Loans
It should be noted that there are a number of considerations that go into deciding how to finance a college education. And we understand that choosing to borrow money for college can be stressful and may not come without a lot of thought and deliberation. So, the following information may be helpful in shaping your knowledge of the world of student financial aid programs and the options available.
First, student loans should generally be considered the last resort on the road to paying for college. Besides whatever personal savings you have, including money from 529 plans, there are student financial aid programs that award money which usually does not need to be repaid. Think grants and scholarships. But, if the amount of money from savings, gift aid, and, possibly, a part-time job are not enough, you may need to consider borrowing loans, starting with federal student loans before private student loans.
Student Loans: Where to Start
The starting point to qualify for any financial aid is always the FAFSA (Free Application for Federal Student Aid). Be sure to pay attention to the priority filing deadlines in your state or at your college because aid may be awarded on a first-come, first-served basis.
If it turns out that you do need to borrow to pay for college, rest assured you are not alone. According to a study published by Sallie Mae and Ipsos entitled “How America Pays for College 2016,” students are expected to be responsible for more than 1/5 of college costs, with 14% to be paid from student loans and 8% from the student's income and savings.
While parents expect to pay the largest share of college costs themselves, about one-third of the costs (23% from savings and 11% from parent income), the amount of debt used to finance education cannot be understated. The stark reality is the majority of debt borrowed in this country happens at the student level versus the parent level; this means more students than parents are carrying education debt in their name. In fact, nearly 70% of graduating college seniors from 2014 who attended either a 4-year public or 4-year private nonprofit college or university had student loan debt, based on the 10th Annual Project on Student Debt (“Student Debt and the Class of 2014”) published by The Institute for College Access & Success (TICAS). This group of borrowers owed an average of $28,950.
What to Keep in Mind
When you consider the value of a college education — including the fact that average lifetime earnings for college graduates are nearly $1 million more than individuals with only a high school diploma or GED — student loans may still be a smart investment. And, keep in mind that if you budget properly and have a good sense of the actual amount of money you need in loan funds to supplement other forms of aid as well as your resources, you can limit your overall indebtedness by borrowing only what you truly need. You should also consider the fact that there are no prepayment penalties. (Note: the lender partners on our site do not charge a prepayment penalty.)
So, accelerating payments to reduce total interest paid and limiting the amount of time on your repayment horizon are smart moves.
One of the easiest ways to reduce the amount of interest you will repay over the life of the loan is to pay as you go while in school. Your lender will ask you to choose the type of repayment plan that best fits your situation and current income. Options include making interest-only payments while you are in school; making a small, fixed payment during school (which may help reduce the principal balance, depending on the payment amount and size of the loan); or deferring payments all together until you are out of school. The last option will obviously cost the most money because any unpaid (accrued) interest that is not paid before the end of your grace period will be capitalized — or added — to your outstanding principal balance prior to the start of repayment.
An important consideration is the deferred repayment option means your loan balance at the start of repayment will be higher than what you originally borrowed due to the interest capitalization. Also, don’t let the lack of a sizeable payment stop you from sending even a small contribution to your student loan. As insignificant as it may seem now, even a payment of $10 or $20 a month can help curb the amount of money that would be capitalized on top of your outstanding balance.
Every little bit helps.
One final thought concerning the use of private student loans: get a good understanding of the interest rates as well as the loan’s other terms and conditions. Most lenders offer you a choice between a variable or fixed APR (annual percentage rate), so be sure to read up on the differences between the two interest rate options. Keep in mind that the rates advertised may not necessarily be the rates you qualify for based on your creditworthiness — or that of a qualifying cosigner.
For example, you may see variable rates advertised as low as 2.20% APR and fixed rates starting around 5.00% APR. But this is a sunny day scenario. You and/or your cosigner would need to have the right qualifying credit score or credit factors to achieve the lowest rate, and the lender may impose requirements such as signing up for auto-debit from a checking or savings account to lock in these low rates. So, look for the asterisks and footnotes along with the fine print to understand what it takes to achieve or put you in the running for the advertised rates.