How Do I Choose a Private Student Loan?

Deciding how to fund your education is a daunting task. There are many options to choose from and a plethora of terms with which to become familiar. Student loans are similar to traditional loans, where you are loaned a specific amount of money with the understanding that it will be paid back with interest.

One main difference between standard loans and some student loans is the grace period, sometimes called the deferment period. This period allows a student to focus on school without requiring payments or requiring only interest payments.

If you’re choosing between different types of loans for your college education, here are some details to help you understand how to select the best one for you.

What is a Private Student Loan?

A private student loan is a loan designed for and granted to college students. These loans come in different amounts, interest rates and involve differing repayment methods. Most credit unions offer private student loans or forms of student financial assistance.

Qualifying for a Private Student Loan

Many lenders require proof of at least part-time enrollment at an educational institution in addition to having a form of income. If you are just starting out and haven’t built up your credit history and credit score yet, they may require a cosigner.

A cosigner is someone that guarantees to the credit union that they will be responsible for making the payments on the loan if you can’t afford to or repay the loan in its entirety. Your cosigner will need to have a good credit score and a relatively low debt-to-income ratio so the lender can be reasonably sure the loan will be paid back.

Types of Private Student Loans

Private student loans can be structured in any way the institution offering them wants. Generally speaking, private loans take the form of unsubsidized loans. A subsidized loan is a loan in which someone helps the payor if they cannot make payments, such as when a student is in school using the loan to pay for classes.

An unsubsidized private student means the borrower is responsible for all payments, whether or not they are in school. This can place more of a burden on an already tapped out student, which is why some private lenders structure unsubsidized loans for students.

T&I Credit Union offers a structured loan in the form of an undergraduate line of credit. A student line of credit works similarly to a credit card. You can charge your education-related expenses to your line of credit and make payments with the payment plan you select.

Private graduate student loans are loans designed for people looking to advance their careers. Graduate loans generally have higher loan limits because graduate tuition is more expensive, and many graduate-level students already have income sources, making lenders more comfortable with lending larger amounts.

Parent Plus loans enable parents of students to take out loans to help their children pay for college. Lenders offer Parent Plus loans in variable and fixed rates options, various loan amounts and loan terms, and generally follow prevailing loan interest rates and repayment periods.

Monthly Payments and Interest Rates

Student loan payments are due monthly, with a certain amount of interest charged on the remaining principal. Interest rates will vary as well. Loan interest rates are based on the prime rate established by lenders for their most trust-worthy patrons.

These patrons receive the lowest rates, with rates increasing as the credit score decreases. Student loans target young people without much income, so medium to higher rates are the standard for these loans.

There are exceptions, however. Private student loans have averaged between 1.2% and 12.99% on variable rate loans and 3.82% to 8.63% on fixed-rate loans in the last few years. For example, T&I Credit Union’s undergraduate line of credit rate can be as low as 5.25%.

Rates for student loans vary in type, similar to general loans. A fixed interest rate loan is one where the rate doesn’t change over the loan’s payment period. A fixed rate means you pay the same amount of interest for the entire term.

The rate of a variable rate loan changes with prevailing interest rates. One month your payment might be $200, and the next, it could be $201.10. Generally speaking, variable rate loans have slightly lower rates. Some might also have rate caps, where the rate has a specific level that it cannot exceed.

When you’re considering which type of private student loan is best for you, it might help to figure out how much money you’ll need and have a general idea of how you’ll pay it back.

Determine Your Needs

Look at your program’s number of credits to graduate with the degree you want, and multiply the tuition per credit by that number. Allow an extra 5% — 10% or so to compensate for any tuition changes and books.

If you’re going to need room and board, include an estimated cost for that as well. Add your estimates together, and you have a rough idea of how much you’re going to need to fund your education.

If you have a job, you’ll be able to reduce the amount you request by however much you can put toward any of the costs. Once you know roughly how much you need, look at your lender’s student loan repayment terms. Use an online loan repayment calculator to give you an idea of your monthly payments.

T&I Credit Union’s student loan program is different from a traditional private student loan. They offer an undergraduate line of credit, where you charge your college expenses to your charge account. The account has a limit that can be charged, similar to a credit card (qualified borrowers can get up to $75,000).

This makes funding your education after exhausting your federal loan and grant options much easier because you can estimate the amount you need, request a line of credit, and begin paying for your education.

Making payments on a student loan is one of the difficulties many students encounter. Private loans can have any repayment options the lenders can come up with, but there are generally only a few standard repayment configurations.

Repayment Options

Many financial institutions offer a few options on their private student loans. You’ll begin making payments on your student loan immediately, or you’ll be given a grace period of a few months before needing to start making payments. Some might allow you only to make interest payments while you’re in school or defer payments until after you graduate.

Other institutions might not have many options at all other than to begin making payments. T&I Credit Union lets you choose from making full payments while in school, deferring both interest and principal payments, or making interest-only payments. Having options makes it easier to fund — and repay — your education the way that you want.

Using the Information to Choose the Right Loan

Once you have all the information you need, you can choose the private student loan that is right for you. T&I’s undergraduate line of credit is designed to help you fund your education after you have used up all of your lower-cost options. How does this help you?

Federal student loans have lower, fixed rates and have loan forgiveness criteria that you can meet in certain circumstances. T&I’s private student loan helps you reduce your overall debt by supplementing your lower-cost loans instead of replacing them.

Talk to Your Lender

T&I Credit Union has been helping students achieve their educational goals for years. Planning for your future can be challenging, which is why we have designed our undergraduate line of credit with students in mind. If you’d like to learn more about student loans and our line of credit, contact us at (238) 397-3945. We’d love to help you secure your educational dreams.

About Willie Finch

Willie Finch spent over 20 years in the U.S. Marine Corps and has an MBA and BS in Management. He has been writing about personal finance topics for two years and has become fascinated with helping others understand their finances and reach their financial goals.