Our first piece of advice if you’re considering a private student loan is to first max out all available federal loans. These loans have more alternatives than private loans, including repayment plans that are tied to income, forbearance and forgiveness options. Private loans should only be tacked onto your federal loans if you are confident that after you graduate, you’ll be able to get a job that will allow you to service all of the debt you’re accumulating.
But if you decide you can afford the additional debt and must take it on to get through school, here are five tips to help you choose the best private lender:
#1 Look at a Number of Lenders
This tip is critically important, but it will mean a lot of work. You need to do your homework and compare, compare, compare. Even if the first lender you check out seems to have good rates, you’re foolish to sign without checking out several other lenders as well. Federal student loans are no brainers because the government is your lender and rates are the same for all. Private student loans are much more complex and vary significantly by lender so research and comparison is critical.
#2 Look for the Most Favorable Loan Terms
As mentioned above, private loans are more complex. There are fixed rates versus variable rates usually offered by the same lender. Variable rates will be lower and tied to a key index that will fluctuate and may be higher in the long run than the fixed. Repayment periods can range from five years to 10 or more. Longer repayment terms will offer lower monthly payments but will result in more interest paid over the long haul. Shorter terms may result in unaffordable payments. It’s a balancing act.
#3 Look for a Credible Lender
You want to research the private student loan lender to make sure they have been around for awhile and are likely to be around for years to come. If your lender closes up shop, your loan will be sold to another company that you may not like so much. Some lenders are banks or credit unions, but others are private institutions that need more verification before you go with them because they are not as established as a long-standing financial institution.
#4 Look for Education-Specific Loans
Some private lenders are in the generic loan game and don’t have a true educational lending program. To some institutions, a loan is a loan is a loan. You want a lender with program that was established specifically to lend to students. They will understand your needs better and have a grip on what you need and how best to communicate with you. Look for student-centric lending solutions that will not seek repayment until you are out of school, unlike traditional general purpose loans.
#5 Look for Positive User Experience
Student loans can be the best thing in the world if they help you get through school and acquire a well-paying job. They can also be one of the biggest challenges if you over-borrow and can’t afford to service the debt you’ve accumulated. The biggest piece of advice for anyone borrowing to support their education is to borrow as little as possible and to have a clear understanding of what your monthly payments will be after you graduate.
Tuition.io’s free student loan tool is the best way to always know how much you owe, to whom and what your total monthly outlay will be so you don’t get in over your head.