How are interest rates determined for private student loans?
Private student loans usually offer variable and fixed interest rates that are based on the borrower’s creditworthiness. If you have good or excellent credit, then you’ll be eligible for a lower interest rate. But if you have poor or fair credit, prepare for an interest rate on the higher end of the range.
Variable rates rise and fall according to the index they follow. For example, the lender may use the prime rate as its benchmark.
What is ‘co-signer release?’
Most traditional college students don’t have a long credit history, so they turn to another adult to co-sign their loan. A co-signer is an individual who is willing to use their good or excellent credit history to help someone get a loan that the student does not qualify for alone. If the borrower can’t make payments on the loan, the lender seeks payment from the co-signer. If the borrower defaults on the loan, it negatively affects the co-signer’s credit.
Some private loans offer to release the co-signer from the loan after the borrower makes a certain number of payments or meets other requirements. That can protect the co-signer from a credit hit as a result of the primary borrower’s payment history.
Do private student loans allow deferment or forbearance?
Federal student loans allow you to delay your loan payments while you are attending school. Some private student loans offer this, too, but interest still will accrue on these loans. (With federal student loans, interest does not accrue during deferment if you have subsidized federal direct loans, which are available to undergraduates with financial need.)
There are lenders that offer other types of deferment. For example, some allow you to delay your payments due to a financial hardship, like unemployment, or during military deployment.
Be mindful of the amount of interest you’ll owe and any fees the lender may charge for deferment. You’ll want to review your deferment options before choosing a loan.
Like deferment, forbearance lets you suspend payments for a certain period of time. Private lenders may use “forbearance” and “deferment” interchangeably. During forbearance on federal loans, interest continues to accrue, which differentiates it from deferment.
Regardless of whether the suspended payments are referred to as deferment or forbearance, on a private loan, the unpaid interest gets added to your principal, causing your monthly payments to increase once repayment begins again.
Editor’s note: Under the CARES Act, which was passed in response to the coronavirus (COVID-19) pandemic, federal student loan borrowers do not have to make payments for a period of six months, from March 13 through Jan. 31, 2021. Additionally, federal student loan interest rates are set at 0% during that time.
Which fees should I look out for when choosing a private student loan?
Just like you should read the fine print on a credit card, you should understand the fees you might incur on private student loans. Some lenders will add your fees to the loan principal. When you apply for a private student loan, seek out answers to the following questions:
- Is there a loan application fee?
- Is there a loan origination fee?
- Which types of fees could I incur for making a late payment?
- How do I pay the fees?