You’ve started doing the math and you don’t like where it’s going. Between scholarships, grants, work study, family contributions, and federal loans, you still don’t have enough money to pay for college.
Should you consider taking out a private student loan?
Let’s take a look at whether student loans are worth it, and what you need to know if you decide to apply for one.
Is a private student loan a good idea?
It’s important to remember that student loans aren’t debt in the traditional sense. Rather, student loans are investments in your future.
Unlike a car loan, which applies to an asset that quickly depreciates, an education loan funds something that is expected to grow in value over time, that is, your ability to be an asset in the workplace.
Numbers back that up. According to the U.S. Bureau of Labor Statistics (BLS), college graduates fare far better in the labor market than people who don’t attend college. How much better? BLS data shows that:
- People who graduate college with a four-year degree make more than twice as much as those with only a high-school diploma. College grads with Bachelor’s degrees make an average of $1,137 per week, compared to $459 per week for high school grads.
- More education is associated with less unemployment.
- All the increases in employment over the past two decades have been in sectors that require a college education.
Of course, taking out any kind of loan requires serious consideration and shouldn’t be entered into lightly.
Let’s talk about what you need to know about private student loans for college.
A quick vocabulary lesson
The first thing you should do is get familiar with a few key terms related to private student loans. After you have a basic understanding of what these terms mean, we’ll discuss how they pertain to you and your loan search.
Let’s look at terms related to money first:
- APR, or annual percentage rate, is the amount of interest charged on a loan.
- Variable interest rate means that your interest could rise or fall depending on economic conditions. Loans with variable interest rates can be risky, as payments may unexpectedly rise by quite a bit. However, they can be a good value for short-term loans or when interest rates are expected to drop.
- Fixed interest rate means the interest rate will remain the same throughout the life of the loan.
There are also several terms that will come up during the application process. They include:
- Cosigner, or a person who agrees to be legally responsible for paying back a loan if the borrower defaults on repayment. You may need a cosigner if you have a low income or no credit history.
- Credit score or rating, a numerical expression that’s used to rate your credit worthiness based on past payment history.
- Household income is generally the combined amount of all the adult earners in your household.
- Expected family contribution (EFC) is a calculation that is determined based on income questions you answer on your FAFSA application. (For a more in-depth explanation, see this article.)
- Debt-to-income ratio is a percentage calculated by evaluating your monthly income minus all debt payments
How much do you need to borrow?
Obviously, you’ll need to figure out how much money you need to borrow for college — and that number may include more than just tuition. For example, you’ll need to take into account:
- Tuition and fees
- Room and board
- Books
- Personal expenses, and
- Other expenses that might not be obvious, such as travel
After you get your financial aid letters, you can use our College Cost Calculator to help you get a complete picture of your financial needs after taking into account grants, scholarships, and other sources of college funds.
Will the loan be affordable?
To make sure that you’re setting yourself up for success after you graduate, it’s important to understand how loan payments will fit into your post-college finances.
Use our free NitroScore tool to help you figure out if the loan you’re considering is a good fit for you.
Simply type in your school and major and then click “refine my NitroScore.” From there, the NitroScore will assess your loan repayment compared to your likely take-home pay after graduation. You’ll get a score that ranges from “take caution” to “preferred,” so you can have a concrete assessment of any loans that you’re considering.
Check your results for several schools, using the “compare” feature. You may find that you get more favorable results by considering other schools or majors. You can email your results to yourself so you can refer back to them later.
How to get approved for a student loan
Once you know how much money you need, you can start to apply for loans.
Each lender will have their own application process. Most applications can be completed online.
You should have basic paperwork in hand to fill out your application. If you’re applying with a cosigner, you’ll need his or her information as well. Some of the info you might need includes:
- Contact info
- Social Security number
- Basic household information
- A recent pay stub
- School you will be attending
- Anticipated dates for start and end of study
- Major course of study
- Contact info for a personal reference
Some lenders return results within a few minutes, but others may take several days. It’s not unusual for the lender to request additional information while evaluating your application.
What is a cosigner and why is one needed?
Most students will need to apply for private student loans with a cosigner, as loans are evaluated based on credit score and debt-to-income ratio. Few incoming college freshman are likely to qualify for a loan on their own.
Even if the student could qualify, another benefit of a cosigner is it will increase the likelihood of a lower interest rate.
The co-signer agrees to share the responsibility for repaying the loan if the student is unable to make those payments. A cosigner must:
- Have a verifiable income
- Show a good credit history of borrowing, charging and repayment with few or no late payments on their credit report
- Exhibit no excessive delinquencies, judgments or bankruptcies pending, filed or discharged in the past two years
- Have no prior student loan defaults
- Be a U.S. citizen and at least 18 years of age
Note: Many private lenders will allow a co-signer to be released from the loan once a total of 24 consecutive, on-time payments have been made.
What if your private student loan is denied?
- Ensure that your credit report (and your cosigner’s report) is correct and up-to-date. Errors can negatively affect your loan eligibility.
- Apply with a different cosigner, such as a grandparent, other family member, or family friend.
- Think about going to a more-affordable school.
Where should you apply for a student loan?
Nitro maintains with partnerships with several lenders that we have put through a rigorous vetting process to examine rates, financial solvency, and customer service.
We recommend checking out loans from any of these partners below.