For some products and services, it’s relatively easy to figure out which companies offer the best value. But when it comes to shopping around for a student loan lender, the answer isn’t so straightforward.
That’s because the rates and terms offered by each lender can vary widely from borrower to borrower, and there’s no guarantee that a particular lender will give you the best quote. Choosing the right lender is less about knowing which companies to look at, and more about knowing how to separate the bad offers from the good.
That may sound complicated, but we’ve got you covered. Here’s a full rundown of what to look for when comparing student loan lenders.
Max out federal loans
Before you take out a private student loan, make sure you’ve maxed out all available federal student loan options. Federal student loans offer longer deferment and forbearance programs, more income-driven repayment plans, and more loan forgiveness programs than private student loans.
The maximum amount you can borrow as an undergraduate student is $31,000 for dependent students and $57,500 for independent students. If you’ve already hit that limit, then private student loans may be worth looking into.
How to Compare Private Student Loan Companies
Trying to find a private student lender and not sure how to choose the best option? Here’s what to look for when comparing private lenders:
Interest rates
The interest rate is the most important factor to examine when looking for a private student loan. The interest rate you receive will determine your monthly payment and how much total interest you pay. Always look for the lowest interest rate possible.
Private lenders usually offer two kinds of interest rates: fixed and variable. A fixed-rate loan will have the same interest rate and monthly payment during the entire term, while a variable-rate loan will have an interest rate that decreases or increases depending on external market conditions. That means monthly payments can swing drastically with a variable-rate loan.
There is usually a cap on the maximum interest rate for variable-rate loans. While the initial interest rate is lower than a fixed-rate loan, there’s a risk that rates will increase significantly as time goes on. And since interest rates are at near-historic lows right now, it’s likely that rates on a variable-rate loan will increase over time.
It’s wise to compare interest rates from multiple lenders because you never know who will offer the lowest rate. Try to get at least three quotes so you have a variety of offers to compare.
Terms
Repayment terms among private student loan companies usually range from five to 20 years. The term you choose will also impact the interest rate you receive. In general, shorter terms will have lower interest rates and longer terms will have higher interest rates. Shorter terms will therefore have higher monthly payments and longer terms will have lower monthly payments.
When choosing a lender, look at the kind of terms they offer. Make sure to pick a term that you can afford after graduation. Don’t be overly optimistic and choose a shorter term with a higher monthly payment if you’re not confident you can afford it. When in doubt, it’s better to pick a longer-term with a lower payment and pay extra when you can afford to.
Cosigner
Most private lenders require that you have a cosigner. This is someone who agrees to take full financial and legal responsibility for your loans if you default.
If you need a cosigner for a private student loan, you can ask any adult you know. Most borrowers ask a parent, other relative or mentor to act as a cosigner. While the specific requirements vary by lender, the cosigner usually needs to have a good credit score, stable job history, and enough income to qualify.
Unlike other private student loan companies, Funding U does not require a cosigner. Instead, we use your GPA and major to determine if you qualify for a loan.
Loan limit
The loan limit refers to how much you can borrow. Private lenders will usually have both an annual loan limit and an aggregate or total loan limit. At Funding U, the annual limit is between $3,000 and $15,000 per year.
Some lenders have a loan limit that is the annual cost of attendance minus any other financial aid, but these lenders usually require a cosigner if you’re borrowing a large amount.
Credit score and income requirements
Many private student loan companies will have income and credit score requirements. The average credit score requirement for a private student loan is 670 or more. If you don’t meet the threshold, then you may have to add a cosigner to qualify.
The income requirement depends on the lender but is usually at least $30,000. If you don’t have that kind of annual income, you will likely need a cosigner no matter which lender you choose.
Repayment options
Private lenders offer a variety of repayment options including deferred payments, interest-only payments, and full interest and principal payments. Most lenders require that borrowers make some kind of payment while they’re enrolled. At Funding U, the minimum monthly payment is $20.
Before deciding on a lender, estimate how much you can afford to pay while you’re in school. Make sure the lender you choose offers monthly payments that fit your budget.
Forbearance options
Private student loan companies usually offer some kind of forbearance program, which lets borrowers skip making student loan payments when they can’t afford them. Forbearance is often a godsend if you’ve lost your job, are facing a medical emergency, or have some other kind of financial disaster.
Forbearance programs can be as short as one month or as long as a year. Most private student lenders will still charge interest during the forbearance program, and many will still require some kind of payment.
Shop around to see which lender offers the best forbearance program. Even if you think your career will always be secure, remember that many borrowers became suddenly unemployed during the Covid-19 pandemic. In other words, it’s usually best to choose a lender with a generous forbearance policy.
Disclaimers
