A Tutorial Guide on Evaluating a Private Student Loan Lender

Selecting a private student loan lender is difficult. It requires a tenacious review of all options. Rushing into a private loan servicer can create massive headaches and unforeseen heartaches. When selecting a private student loan lender, consider these four categories in your search: eligibility criteria, repayment/servicing, interest rates and fees, and borrower protections.

Eligibility Criteria

First things first: understand the eligibility criteria for obtaining a private student loan. Ask yourself the following questions:

• Is there a minimum credit score required to obtain the loan?
• What is the appropriate debt-to-income ratio for receiving a loan from this lender?
• Does borrowing a student loan this year impact my future eligibility for loans from this lender?
• Can I access this loan each year? Do I need to reapply each academic year?
• Does this lender require a co-signer if my credit history is insufficient or nonexistent?
• Does this lender have an annual and lifetime aggregate loan limit?
• Can I use this loan to cover my past due balance? Or is it for balances owed in the current term?
• Do I need to be full-time to receive the loan? What degree programs are eligible for this type of loan assistance?
• Does this loan servicer require that I maintain satisfactory academic progress?

Repayment & Servicing

Meeting eligibility criteria is just the first step in selecting a private loan servicer. Your next step is to scrutinize the repayment and loan servicing options your lender offers. Unlike federal student loans, which offer a variety of repayment options, private student loan lenders may be more restrictive in their repayment options.

Carefully read and re-read all terms and conditions associated with the loan product. When does repayment start? Some loan services require in-school repayment, while others allow you to defer payments until you graduate or conclude your studies. In-school repayments are harder to manage if you are not working full-time. If you are unsure about when repayment begins, ask your potential lender.

Another thing to consider is repayment length. Is it a standard repayment plan? Is it a graduated repayment plan? Are there any balloon payments along the way? Again, examine the loan’s terms and conditions. Too many follies happen at this stage, which cost students big time down the road.

While most loan products do not feature a prepayment penalty, some do. So, ask your loan servicer if there’s a prepayment penalty if you decide to pay off your loans early. You never know when you may have an inheritance bequeathed to you or when your income increases to a pleasurable level. While paying off your loans early is always a sensible option, it can cost you dearly if the lender charges a penalty.

The last two items to consider in this section are loan delinquencies and default. Falling behind on just one payment can harm your credit score. Depending on the frequency of delinquent payments, your loan servicer may declare you to be in default status. Default is a devastating consequence of failure to repay. A default can also have a long-term impact on your credit history, which can hamper your ability to access other loan products in the future. Again, read and ask your loan servicer about their policies regarding delinquency and default. If you are having issues with making payments, talk to your loan servicer before it becomes a significant problem with severe consequences.

Interest Rate & Fees

When evaluating private loans, spend some time fixating on the loan’s interest rate and fees. Shop around with multiple lenders to see if you can get better financing elsewhere. Do not settle for the status quo unless it is your only option.

Ask yourself the following questions when reviewing a private student loan’s interest rate and fees:

• What is the loan’s interest rate? Is it a fixed interest rate or a variable interest rate?
• What is the annual percentage rate?
• When does interest begin to accrue on the loan? Is it after the loan deferral period, or does it accrue the moment it disburses?
• When does interest capitalize?
• Are there any fees associated with the loan?

Borrower Protections

At this stage, you have reviewed the three most important components of a private student loan: eligibility criteria, repayment/servicing, and the interest rate and fees. You are feeling confident, almost ready to decide. Now it is time to settle on the final matter: borrower protections.

No loan servicer is perfect. You should have some borrower protections built into the loan product to protect you in the event of deceitfulness by a loan servicer.

Ask the loan servicer which conditions qualify a borrower for loan discharge. For example, what happens in the event of an untimely death or disability? Also, inquire about repayment options when encountering payment difficulties. For instance, does the loan servicer offer forbearance, reduced payments, or deferral? Does interest continue to accrue during temporary relief stages?

Refinancing is often a sore subject with private student loan borrowers. Not done correctly, it can lead to even greater issues than before the consolidation. To avoid gnarly surprises, inquire with your loan servicer about their refinancing options. Try to avoid third-party alternatives to refinancing whenever possible. Those entities may not have your best interests in mind. Since refinancing is a complex financial topic, depending on your personal financial situation, you should consult a financial advisor to discuss the best path to pursue. No financial aid office or loan servicer can offer you financial advice outside the lens of financial aid and student loans.