Shopping for private student loans

With the start of the college fall semester just weeks away, there is still time to shop for more money to cover any gaps in your financial plan.

One place to shop: the market for private student loans.

While interest rates have been inching up on these loans in recent weeks, parents with good or excellent credit may find they can pay less than on federal lending programs.

But there are plusses and minuses to this option.

As of mid-July, the average rate on a 10-year, fixed rate private student loan ranged from 3.22% to 13.95%, according to data from Bankrate.com. Variable-rate student loans — available only from private lenders — ranged from 0.94% to 12.99%.

By contrast, rates on federal student loans for the 2022-2023 academic year now stand at 4.99%, while parent PLUS loans are 7.54%.

While some experts say students should prioritize federal loans because they are cheaper and have better repayment terms, private student loans offer financing for those borrowers who have exhausted federal loan limits.

Private student loans — from a bank, credit union, nonprofit or an onlineonly lender — don’t require filling out the FAFSA, or Free Application for Federal Student Aid.

In nearly all cases, undergraduate students will need to apply with a parent or other eligible co-signer who meets the lender’s income and credit score minimums. (Co-signers are equally responsible for repaying the debt if the principal borrower cannot.)

Perhaps a better strategy, parents with very good credit can apply for a loan in their own name.

Private lenders offer both fixed and variable rates, so consider your plan for how quickly the loan will be paid off. With the possibility of interest rates inching higher the remainder of this year, locking in a fixed rate might be more prudent.

Experts say one of the biggest mistakes borrowers make is not researching the loan market for private loans. With lots of lenders out there and so much information available online, comparison shopping has never been easier.

Many lenders offer tools on their websites that let you estimate the rate and term you could get based on your or your co-signer’s financial characteristics.

I recommend applying for several loans to compare the actual interest rates and fees. For example, Sallie Mae offered a fixed rate of 3.75% to 13.72% depending on your credit rating, while its variable rate loan ranged from 0.985 to 10.04%.

College Av offered fixed rates of 3.39% to 13.95%, while its variable rate started at 0.94%.

Among other details to consider:

If you have an existing relationship with a bank that makes student loans, that’s often the best place to start. You may be able to get a loyalty discount, typically in the form of an interest rate reduction, that can make your loan less expensive.

Compare the monthly payment and total payments over the life of the loan. A longer repayment term will increase the total amount of interest due.

Are there origination fees? Also, ask about early repayment terms and late payment penalties. What’s the lender’s policy toward renegotiating if you need to lower monthly payments?

—Can you sign up for automatic payments? If so, borrowers may be able to lower their interest.

—Unlike the moratoriums currently in place on repaying federal loans, private lenders aren’t as forgiving.