More than half to two-thirds of people who attend college take on debt — most often in the tens of thousands of dollars. According to the Federal Reserve, in 2021 the median amount of outstanding education debt was between $20,000 to $24,999 .
Federal student loans are one option for students looking to borrow to help pay for their education. In the case that federal loans aren’t enough, private student loans could be considered. Finding a reputable lender is essential when entering a long financial relationship.
Student loans are often the first major debt a young adult signs their name to, so evaluating potential lenders is a good first step when considering a private student loan.
There are some general considerations to keep in mind when evaluating private student loan lenders. Keep in mind these are general considerations when deciding between private student loan providers and not an exhaustive list.
Each potential borrower will need to consider her or his own financial situation to help make an informed decision.
1. First Things First: Reputation Before Rate
Before even considering the interest rates, savvy students look for indicators that a loan company is legitimate. Bottom-of-the-barrel interest rates might seem attractive, but if the bargain comes at the price of doing business with a dubious company, potential borrowers may want to steer clear.
Several options are available for researching a lender’s reputation. The Better Business Bureau or the local chamber of commerce are good first places to check.
Look up the name of the lender and the parent company, if there is one, to find any reviews that might be available. If nothing is found on these channels, a general search online often yields news stories or first-hand accounts pulled from multiple sources that can help paint a picture of how the lender treats customers.
Other ways to verify reputation and legitimacy are by checking any accreditations, endorsements by other credible entities, and backing by established institutions.
It’s also worth talking to recent grads and trusted colleagues. What lender do they use? What has their experience been? While anecdotal advice adds color, though, it shouldn’t be the bulk of research.
2. What Rates Are Offered?
Another factor to consider is a lender’s interest rate. The higher the interest rate, the more money the borrower will pay on top of the loan amount — it’s how the lender makes money. For example, private student loans can be fixed vs. variable and have a wide range of interest rates.
Variable Rate
A loan with a variable interest rate — also known as a floating rate — changes interest rates over time. When and how the interest rate changes depend on the terms of the loan and will vary from lender to lender. Typically, the rate is tied to a specific index and will impact monthly loan payment amounts. A rate cap is generally outlined in the terms of your loan. This is the highest the interest rate may rise.
Fixed Rate
A fixed-interest-rate loan carries an interest percentage that does not change over the life of the loan. The interest rate at the start of the loan stays the same until the loan is repaid.
Choosing Between Variable or Fixed Interest
Variable rate loans may seem attractive because the initial rates are often lower than fixed-rate loans. However, since rates will fluctuate, variable rate loans can be more costly in the long run, especially if a borrower has the loan for a lengthy period of time.
Borrowers who wish to lock in one rate and the same monthly payment each month are generally better served with fixed-rate loans. Because the interest rate doesn’t change, monthly payments will stay the same, which can help with budget planning and financial management.
3. What Are the Loan Terms?
The term refers to the length of time a borrower has to repay the loan. In general, the longer the loan term, the more interest a borrower will pay.
Shorter term lengths usually have higher monthly payments than longer term loans, as the loan has to be repaid at an accelerated schedule. Some lenders may offer flexible repayment options. Other lenders may have fixed term lengths and monthly payments.
When deciding between lenders, verifying available term lengths and options can help borrowers select a lender that offers terms that fit their budget and repayment timeline.
4. In-School Repayment Options
Will you be required to make payments on the loan while you are actively enrolled in school? Be sure to find out what the lender’s policies are. Some private lenders will allow borrowers to defer their payments while they are enrolled in school. Using in-school deferment can be helpful if you are tight on money as a college student. But, during this time interest will likely continue to accrue on the loan, which may increase the cost of borrowing over the life of the loan.
Other in-school payment options include making interest-only payments or making flat-fee payments each month. Understanding whether or not you’ll be required to make payments while you are in school is important as it can have an impact on how you manage your money as a student. Review the options offered by your chosen lender closely. For more information on college budgeting ideas and more, check out SoFi’s Ca$h Course: A Student’s Guide to Money.
5. Have You Exhausted Your Federal Loan Options?
A quick check before applying for private student loans: Did you take advantage of any available federal student loans? They offer several benefits not found with private student loans. Here’s a brief overview of some of the benefits and protections offered for federal student loans, but not private student loans:
• Interest Rates. Federal student loans generally have a lower interest rate than private student loans. Interest rates on federal student loans are fixed and are set annually by Congress.
• Repayment Plans. Federal student loan borrowers have a few different repayment options to choose from, including income-driven repayment plans that can help make loan payments more manageable.
• Loan Forgiveness. Borrowers who work in public service or other qualified professions may qualify for loan forgiveness through programs like Public Service Loan forgiveness or Teacher Loan Forgiveness.
• Loan Deferment and Forbearance Options. Loan deferment and forbearance options may be available as a temporary relief if a borrower is having trouble making payments.
• Subsidized Loans. Undergraduate students who exhibit financial need may qualify for Direct Subsidized Loans. The government covers interest charges on this type of loan while the borrower is enrolled in school, during the loan’s grace period and during other qualified periods of deferment.
For these reasons, borrowers are encouraged to consider federal student loan options before opting for a private student loan. But, as mentioned, there are borrowing limits associated with federal student loans. And in some situations, private student loans can be a helpful tool to help borrowers pay for their college education.
6. What Fees Are Associated with the Loan?
No one likes additional fees, especially when they’re associated with a loan. Unfortunately, lender fees are not uncommon. Reading the fine print and speaking with loan representatives to understand the fees each lender charges is an important part of the search process.
Charges may include application fees, late fees, insufficient fund fees, and origination fees. Understanding which lenders charge fees can help if you are interested in avoiding student loan fees. When comparing loans from different lenders, be sure to review the APR, or annual percentage rate, associated with the loan. The APR is a reflection of the interest rate and any additional fees, so it is more representative of the total cost of the loan than comparing interest rates alone.
7. What Happens if Your Financial Situation Changes?
Unpredictable circumstances happen all the time. In recent years, recessions, pandemics, and natural disasters count among the various catastrophes impacting people all over the world. Circumstances like these — along with many others — can put a dent in your finances.
For borrowers, a change such as a job loss might mean the difference between paying their student loan bill for the month — or not. Because financial circumstances are prone to change, a borrower may want to compare private student loan lenders.
How flexible are the lenders with monthly payments? Do steep late fees pile on if a borrower can’t make a monthly payment? What happens if a borrower needs to refinance or decrease monthly payments? These are all questions to consider and discuss with potential lenders.
Lenders that lack flexibility can mean the difference between thousands of extra dollars of debt if unforeseen circumstances change your finances and you’re unable to make your payments.
8. Does the Lender Offer any Incentives or Perks?
Once the serious stuff is considered, such as reputation, interest rates, term, and fees, there’s room to evaluate lenders on what else they can offer. Some lenders, like SoFi, offer career services and rate discounts.
Others may offer bundled banking so borrowers can have all financial services in one place. There also may be referral fees a borrower can earn for recommending the lender to others.
While the perk factor probably shouldn’t carry the heaviest weight in your comparison, it still might be worthwhile to evaluate.
9. Customer Service Quality
Finally, consider the company’s customer service quality and reputation. Should you run into any issues during repayment, a company with excellent customer service can make a difference.
The Consumer Financial Protection Bureau operates an online complaint database. Here, you’re able to read any online complaints associated with a particular company in order to make a more educated decision concerning their customer service reputation.
The Takeaway
Once you complete your research and comparison shopping, you may be ready to apply for a loan to pay for your education. With SoFi private student loans, undergrads and grad students can apply for a no-fee loan. That includes no application fee, no origination fees, no insufficient fund fees, or late fees.
For further savings, SoFi also offers an interest rate deduction if you enroll in automated payments from your checking or savings account.
FAQ
What are typical private student loan interest rates?
As of August 2022, interest rates on private student loans may range from 3.22% to 13.95% fixed and 0.94% to 12.99% variable. Keep in mind that interest rates can vary from lender to lender and are based on the individual applicant’s financial history, income, and credit score, among other factors.
Can you start repaying student loans while still enrolled in school?
Yes, you can start repaying student loans while you are enrolled in school. For most federal student loans, students enrolled in school at least half-time are not required to make payments on their loan but have the option to do so.
For private student loans, the policy will depend on the loan terms and conditions. Some private lenders offer in-school deferment options while others may require in-school loan payments.
Do student loans have prepayment penalties?
Do student loans have prepayment penalties?
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