How to Compare Private Student Loans: Tips for Borrowers

To compare private student loans, you can look at various factors, such as the APR, repayment terms and fees. A solid comparison can help you understand and find the best offer for your needs.

Prior to applying, it’s important to consider the eligibility requirements of a private student lender. Lender requirements can include:

• Credit history: Your credit score is used to determine eligibility for private student loans, as well as the interest rate and terms. If you have a good credit history, you are more likely to be approved for private student loans and get good terms. You will likely need a co-signer if you don't have a credit history.
• Income or debt-to-income ratio: A lower debt-to-income ratio (DTI) could mean a lower interest rate. However, if your ratio is high, you may have trouble being accepted or may be subject to higher interest rates. Typically, the standard DTA to qualify for a loan is under 50%.
• Age and citizenship: Applicants for private student loans must typically be over 18 and have a high school diploma or equivalent. While some lenders may offer loans to non-citizens, most lenders require borrowers to be U.S. citizens.
• School and program eligibility: Lenders often require students to at least be enrolled half-time in a two-year, four-year, or vocational program, but this varies from lender to lender.

The primary point of comparison between student loans should be the interest rate. Your interest rate, expressed in percentage, is how much you’ll pay on top of your principal or borrowed amount. It often starts to accrue as soon as the loan is disbursed for most types of loans except subsidized federal loans.

It’s especially useful to compare private student loans based on the annual percentage rate (APR). You can also look at fees associated with the loan, in addition to the basic interest rate, to get an idea of what you will pay over the life of the loan.

There are two types of interest: fixed and variable. Fixed interest rates won’t change for the life of the loan, which means your monthly payments will also stay the same. Variable interest changes based on a benchmark or index that your lender uses and can go up or down depending on external factors. Low interest rates are beneficial, but keep in mind that variable rates can change your repayment obligation in the future.

While federal student loans typically offer the lowest interest rates, private lenders usually base interest rates on your creditworthiness. However, since many students don’t have credit built up yet, you are likely to get a higher interest rate unless you have a co-signer with good credit.

Student loans typically come with lengthy term options, from 8 years, 10 years and 15 years or more, depending on the lender. Keep in mind that a longer term is not always better. The longer the repayment term, the lower your monthly payments — but the more interest you’ll pay over time. Conversely, a shorter repayment term comes with higher monthly payments, but you’ll pay less interest in the long run. That’s why it’s important to compare private student loans based on both interest and repayment terms.

Your loan may include a grace period, which is a period after graduation when you are not required to make payments. The length of the grace period varies depending on the lender, but a typical length is six months. However, interest will still accrue even during the grace period, which will increase your loan costs.

Repaying a private student loan is straightforward — you simply send payments to the lender according to your agreement. Federal student loans come with several repayment options, such as:

• Income-driven repayment: There are several repayment plans that are based on your income, such as the Revised Pay As You Earn Repayment Plan (REPAYE Plan), Pay As You Earn Repayment Plan (PAYE Plan), Income-Based Repayment Plan (IBR Plan) and Income-Contingent Repayment Plan (ICR Plan).
• Traditional repayment: Traditional repayment plans are where you pay a fixed amount every month for the life of the loan.
• Graduated repayment: This is where your payments are low at first, then increase every two years to amounts that ensure your loan is repaid by the end of the agreed term.

Most student loans come with fees that vary from lender to lender. These include origination fees, application fees, late payment fees and prepayment penalty fees.

Federal student loans come with an origination fee, while private student loans don’t usually have origination fees. Reading through the breakdown of loan terms is essential prior to you accepting an agreement, as fees can pile up — making the cost of borrowing higher.

Note that the Truth in Lending Act (TILA) requires private student loan lenders to disclose a clear breakdown of the loan, so if there is anything unclear, you might want to choose another lender. You should be able to see the:

• Loan amount
• Interest rate
• Length of the contract or term
• Repayment schedule
• Method of payment
• Late payment fees
• Other fees involved
• Conditions for benefits and perks (if any)
• Details of both the borrower and lender

Since many students don’t have a credit history, lenders may require a co-signer. A co-signer takes equal liability for the loan, which reduces the risk on the lender’s end and increases your likelihood of getting better rates and terms. Typically, co-signers for student loans are parents, guardians or close relatives with good credit.

If you fail to repay your student loan, your co-signer will be responsible for paying it back. You may want to consider lenders that offer co-signer release terms. The lender releases the co-signer from the agreement after a certain period. This is often a year or so when you’ve demonstrated your responsibility and reliability to repay the loan.

To entice potential applicants, some lenders offer rewards or perks. The perks can vary from lender to lender, but some common offers include discounts on interest rates for automatic payments or good grades.

You may benefit from a lender that offers opportunities for savings. You can ask if the lender offers any perks and how to qualify. You can often find this information on their website. You can try calling or emailing with questions, which can give you some insight into the lender’s customer service approach.

After you’ve maximized your federal loan options, you may want to take out a private student loan to cover additional education costs.

You may want to consider a private student loan if:

• Your federal student loan options have been exhausted and you need assistance covering educational gaps.
• You have a co-signer with excellent credit.
• Your current financial aid or funding does not cover the full cost of your education.
• You’re an international student.
• You need funds in a rush.
• You have expenses your federal loans won’t cover.

Before taking out a private student loan, maximize your federal student loans. Federal student loans have lower interest rates than private ones.