Applying for Student Loans Tips: What You Need to Know About Private Loans
College is expensive!!
And if you have no way to pay for it, you’re probably going to need to get a loan.
However:
Applying for student loans can be daunting when there are a lot of confusing terms! It’s hard to figure it all out on your own.
But:
I’m here to walk you through the process and answer any questions you may have about applying for student loans. In this post, I’ll simplify things so that you can make your loan choices with confidence.
But FIRST:
If you haven’t already applied for FAFSA – read this article. It goes over your other options for paying for college, like scholarships and federal grants.
AKA money you don’t have to pay back. Get more information about federal loans right here.
You’ll want to exhaust ALL of your other resources before taking out a private loan. You may just find a way to bankroll attending college without applying for student loans.
If you end up applying for student loans, you’ll have to pay it ALL back.
Student loans are rarely forgiven, usually, only death or permanent disability will get you out of repaying them. Even in bankruptcy cases, private student loans are doubtful to be forgiven.
And:
Think again if you think you can get out of it by defaulting on the loan and waiting 7 years for it to fall off your credit report. The private lender may sue you once you default on a student loan and then garnish your wages – as much as 25%.
This is all scary financial stuff, but you need to be aware of all the consequences if things go sideways. Knowing it all will help you make the best decision for yourself.
No one wants to go into debt. But if you must, then let’s talk about how to do it the smart way.
So from here:
I’ll assume you’ve already looked into your other options for paying for school. Now you’re checking into your last option: private student loans.
Applying for Student Loans Tips (Private Loans)
Private student loans are loans you take from a lender such as a bank, credit union, state agency or a school.
These ALWAYS end up costing you more, but sometimes they’re your only option.
Do I Need a Good Credit Score?
If you choose to get a federal student loan after applying for FAFSA, then NO.
If you apply for student loans from a private lender, then YES. It will be one of the most important factors.
Tip: Credit Karma is a free way to check your credit report (updated every 7 days).
If you’re not monitoring your credit, you should be!
Why?
It’s often good to know what’s making your credit go up or down. If you are late on a payment, you will generally see the effect within 30 days and see your credit score drop.
This can help you realize how much even just one skipped payment can affect your credit. A visual like this can help you stay on track financially.
Checking your credit also helps ensure that fraudulent accounts or incorrectly reported information can be fixed quickly.
Also Read: Budgeting Tips for College Students (Free Printable Budget Worksheets Included)
Why is My Credit Rating Important?
Here’s why when applying for student loans, your credit rating is essential:
The companies lending the money look at your credit rating to see how well you’ve paid your bills in the past. If you are behind or have skipped payments, they will NOT want to work with you.
Let’s put it this way:
If your little brother wanted to borrow $100 from you, but you knew the last two times he borrowed from other people, he didn’t pay them back – would you do it?
It’s the same with loan companies.
The way you treat other creditors is a good indication of how you will treat them.
Plus:
Your credit score determines private loan interest rates.
Note that: the interest from private loans is usually NOT tax-deductible when you use it to pay for college.
What is a Cosigner?
A cosigner may be required on a loan if you do not have enough established credit or a high enough credit score.
This is someone with excellent credit who will be responsible for paying your loans if you do not.
And because of that:
It’s not that easy to find a cosigner. This has to be a person that has absolute trust in you.
If you miss a payment, it will also bring their credit score down. And if you stop paying altogether, lenders can come after the cosigner’s assets.
What Types of Loans are There?
When applying for student loans, keep in mind there are different types. The type of private loan you take will also affect the interest rate.
Types of private loans:
Secured – this is a loan where you leverage your personal property to obtain the loan.
This could be cash or other valuable items (like a car). The problem with this is:
If you want to use the cash – you can’t. The bank holds onto it. Or, if you used a vehicle as collateral, you cannot sell it while the bank secures it.
Unsecured loans – these are loans taken without leaving collateral.
These are usually only given to people who have a long history of positive established credit. These types also have higher interest rates called “personal” or “signature loans.”
Open-ended loans – these are usually credit cards.
Open-ended loans have an amount of credit you can borrow, pay back with interest, and borrow again.
What is Student Loan Refinancing?
Refinancing a student loan is when you get a new loan with a better, lower interest rate to pay off your current student loans. You then will be paying back that refinanced loan.
There are instances when this is a good option and a not-so-good option.
I recommend reading this super informative article to learn more about student loan refinancing.
A Few Last Tips When it Comes to Applying for Student Loans…
Here are some final student loan tips; information to know beforehand…
1) When applying for student loans, DON’T borrow more than you need – it’s not a free ride.
Remember, you will have to repay your loans PLUS interest. Private loans have high interest so it will pile on.
2) It’s also advisable not to take on more student loan debt than your estimated first-year salary.
You DO want to be able to pay off your loans in a reasonable amount of time after college. Taking on a massive amount of debt for a lower-paying career is just a bad move.
You can check your chosen career field’s expected salary at salary.com, payscale.com, or glassdoor.com.
3) When you take a private loan to pay for college, payments are required WHILE you’re still in school.
Did you know that when you take a private loan to pay for college, payments are required WHILE you're still in school??4) The interest rates are higher with private loans (some more than 15%) and variable – meaning they can go up or down.
Federal loan interest rates are almost always lower. If you can use one of those instead, it will be the better option.
5) With private loans, there will not be options for paying them back.
In other words:
If you cannot pay on time or need lower payments, you’re like my dad says: SOL (SHIT OUT OF LUCK).
6) These types of loans sometimes have penalties for paying early. It doesn’t seem to make any sense, but lenders are businesses.
Businesses want to make money, and they make money off the loan’s interest. You pay less interest on the loan when you pay it back sooner.
So:
If you take a loan and want to pay it off fast, you may pay MORE because of prepayment penalties!
7) Keep copies of loan documents, understand all the terms, and keep in touch.
When you graduate, withdraw, drop below half-time, transfer, change your name or address, or have trouble paying, you need to contact your loan servicer (s). They will help you make changes and may be able to give you options to keep your loan in good standing.
8) Pay on time always, even if the bill doesn’t come.
It’s your responsibility, and your credit (or a cosigner) is affected.
Other questions?
Leave me a comment below to get help with any other questions you have!
DISCLAIMER: This article is for informational purposes. CollegeLifeMadeEasy.com is not responsible for what financial decisions you make. Please consult a licensed financial professional before making any financial decisions.
About Jen
I’m Jen, one of the co-founders of College Life Made Easy: a lifestyle blog that focuses on helping students navigate college life on topics of finance, organization, dorm living and more.