If you’re wondering “What is one benefit of privately issued student loans?” then this article will surely enlighten you.
There are many different ways to pay for college but statistics show that most students turn to private loans before they use all their federal assistance.
With roughly $136 billion owed to private loan institutions as of 2021, says Student Loan Hero, it’s clear to see Americans have been relying on private loans for years.
Let’s take a look at what makes privately issued student loans have an advantage over federal loans.
What are Student Loans?
If you are pursuing a college career, student loans might be a necessity.
Since most individuals enroll in college immediately after high school, they usually don’t have enough savings for college tuition. This is where student loans come into play.
When you apply for college, you’ll fill out a Free Application for Federal Student Aid or a FAFSA form.
This form is submitted to the government and they determine, based on income and assets, how much you and your parents can afford for college.
If you can’t afford much, you’ll be given grants and low-interest federal student loans to assist. This form is filled out every year to ensure that you get the best assistance for school.
However if you don’t qualify for any government assistance or if the amount allotted to you doesn’t cover the entire cost of college, you will need more loans.
What is the Purpose of Private Student Loans?
Private loans are used when the amount from the FAFSA is not enough to cover the total cost of college.
Because the FAFSA is based on your parents financial situation, you could be denied any substantial amount of aid.
If your parents make good money or have multiple assets, you won’t qualify for much federal aid. In this case, you’ll have to get loans to cover the cost of the education.
Many times, the college you’re applying to will have a few lenders that offer private student loans. (The college I went to in New Hampshire had two lenders we could choose from to get our loans.)
You can choose to work with your financial aid office at your institution to access the student loans or you can try to access them elsewhere.
In some cases, the institution itself will offer financing for students.
What is One Benefit of Privately Issued Student Loans?
The greatest benefit of privately issued student loans is the ability to apply with a cosigner.
This is an advantage because you can get a better interest rate if your cosigner has a good credit rating and history.
This could save you a substantial amount of money over the 20 years of the loan.
In addition to being able to have a cosigner on private student loans, you will find several other beneficial aspects.
For example, the interest you pay each calendar year can be used as a tax deduction to boost your return or decrease the amount you might owe.
Moreover, there are no fees if you are able to pay off your student loan earlier than its due date. With some loans, you’ll discover, much to your chagrin, that early payoff triggers fees.
But privately issued student loans do not charge borrowers with penalties when they want to pay off loans early.
One more benefit of private student loans is the ability to release a cosigner. If the borrower is able to meet certain requirements for the lender, the cosigner can be released from the loan.
This is incredibly important for those who don’t want to burden a cosigner with the financial responsibility of student loans for the long term.
Why Private Loans are Better than Federal Loans
In one way you will find privately issued student loans are better than federally issued student loans because of their interest rates.
It’s not necessarily that private loans offer lower rates than federal but they offer choices of fixed rates or variable rates.
Whereas, if you take out a federal student loan, you are given one fixed rate on the life of the loan.
Who is Eligible for a Private Student Loan?
A privately issued student loan is different from a federal student loan in the eligibility process.
With the federal loans, you will qualify through submitting the FAFSA but the private loans work differently.
To be eligible for privately issued student loans, Student Loan Hero reports that you must be at least 18 years of age.
In addition to age requirements, you must be a citizen of the United States and also be enrolled in a college institution.
Furthermore, you must be able to show proof of income to support the cost of the loan.
If this means you have to get a cosigner onboard, then you must do so.
During this process you’ll need to provide a credit score and history, so if you don’t have any, then it’s suggested to find a cosigner who has impeccable credit.
Types of Available Private Student Loans
You’d be surprised with how many different types of private student loans there are available to students.
Sallie Mae, a major distributor of student loans, explains how you can get a student loan for everything related to education.
Here is a list of types of privately issued student loans:
- Undergraduate education
- Career Training for a Trade
- Bar Study
- Graduate Education
- Dental School
- Dental Residency
- Medical School
- Medical Residency
- Law School
As you can see, you’ll have access to loans for any educational path you choose from formal undergraduate enrollment to trade school training.
What Can Private Student Loans be Used For?
When you get approved for a private student loan, it is not like a typical loan where you receive the money and then appropriate the funds where needed.
In fact, you’ll never even see the money from private student loans. The institution that you are borrowing from will release the funds in disbursements when the college requires it.
The loans are disbursed for an array of things including: tuition, room and board, fees, books, supplies, transportation, and even technology including laptops for school.
These are the things that private student loans can be used for.
How to Find and Choose the Right Private Student Loan
Finding and choosing the right private loan is of the utmost importance for your finances down the road.
You’ll want to turn to your school first and check out their recommended lenders. They will usually have a couple to choose from.
Next, the lender you choose will need to be compatible with your school. Some private loan issuers will not service out of state schools.
Others will only service certain types of education so you need to make sure everything is compatible with your school and the financier.
Be sure to get the correct type of loan for the type of education you are enrolling in.
As mentioned above, there are several types of private student loans so be sure to find one that is appropriate.
Best Private Student Loans of 2022
In Conclusion: Always Shop Around
Finally, just as you would for any financial investment, always shop around. There is competition among financial institutions and oftentimes their interest rates will be different.
Look for the lowest rate and be sure you have your credit in order to get the lowest rate.
In order to find a solid institution that is reputable, ask those around you. If you are an undergraduate, ask roommates or classmates what their rates are and where they got their loans.
Just keep in mind that whatever you choose to do with your privately issued student loans, it will impact you for years after you’re out of college.