Private Loans for Students
When considering private student loans, it is extremely important from a personal finance standpoint that you have first exhausted ALL other financing options such as grants, scholarships, and all types of federal student loan options. Without excellent credit histories, students will likely need to find willing, creditworthy individuals to co-sign their private loan applications.
Private Loan Regulations (Title X of the Higher Education Opportunity Act)
As of February 14, 2010, both private lenders and institutions offering private loans to students must comply with a new set of regulations per the Federal Reserve Board.
Under the new laws, a lender offering private loans for postsecondary educational expenses must first provide a disclosure about loan terms and features at the time of application and must disclose information about federal student loan programs that may offer less costly alternatives. If the initial application reaches an approval status, a second loan disclosure statement must be provided to the student at that time. If a student accepts the loan terms provided in the second disclosure statement, a third final disclosure must be provided when the loan is consummated.
An additional piece of the new private loan regulations requires an applicant to complete a self-certification form and return it to the lender before they may disburse the loan to the school. The self-certification form may be found on the lender’s website.
Each private lender may have a slightly different application process, so it is best to contact your private loan lender directly if you have questions.
A lender must provide the student with a 3 day rescission or right to cancel period after the final loan disclosure form is sent to the student. The 3 day rescission period means that once the school has certified your loan and it is ready to be disbursed, there is a mandatory 3 business day waiting period before the lender may disburse loan funds to the school. If a lender only offers a mailed Final Disclosure (not online), then they must wait 6 days to disburse the loan to the school -3 days for mail time and an additional 3 day rescission or right-to-cancel period.
Below is an example of what to expect if you apply for a private loan:
- Apply online and you will receive the application disclosure statement
- Complete the self certification form and return it to your lender
- If approved for the loan, you will be provided an Approval Disclosure Statement
- Finally, you will receive a Final Disclosure Statement allowing you up to 3 days to cancel the loan before it is disbursed to the school
What are Private Loans?
Private loans are credit-based loans applied for through individual banks that help students bridge the gap between the financial aid they have been awarded and any additional amount they feel may be needed to help achieve their educational goals. Being approved for a private loan depends largely on the credit score of the borrower and co-signer. With the continuation of tightened credit markets, the largely held belief is that the majority of students applying for private loans will need a co-signer on the application in order to be approved. While rates and repayment terms on private loans typically aren’t as favorable as those offered on the federal student loans, using private loans is often a wiser financial decision to bridge the gap than using credit cards or home equity lines of credit. However, it is ultimately the responsibility and choice of the borrower and co-signer to make the best personal financial decision.
Who Should Consider Private Loans?
Private student loans may be an important source of funding for students who are in one of three situations, either 1) ineligible for federal student loans, 2) in need of loan funding beyond that which federal programs permit during the year, or 3) owe a balance to Berry College which occurred in a prior academic year (prior to July 1,2010).
As of July 1, 2008 federal legislation forbids an institution from using financial aid funds from a current academic year to pay a prior year balance in excess of $200. If you fall into this category and are unable to pay the prior year balance, then you will need to consider applying for a private loan to cover the prior year balance.
Co-signers and Private Loans
While there is no requirement to apply with a creditworthy co-signer, doing so often increases both your chances of being approved for a private loan and potentially lowers front-end fees and interest rates. Most lenders require student borrowers themselves to have an excellent credit history among other criteria, so it is in your best interest to have a knowledgeable and willing co-signer assist you in applying for a private loan in most cases. Understanding that co-signers don’t want to feel financially responsible throughout the life of the loan in the event the actual borrower defaults, many lenders now offer “co-signer release” options after a certain number of on-time payments have been made, once the borrower passes a credit check at that time.
What is the Private Loan Process?
- Make sure you have completed the FAFSA and accepted your annual maximum in federal student Loans, and exhausted all other financing options first.
- Consider applying with a willing, creditworthy co-signer, as doing so will likely increase your chances of approval and potentially lower your interest rate.
- Carefully review the ELM Select Private Lender List to compare loan products, and apply for the product that best suits your eligibility and needs. Visit the ELM Resource lender list if you are interested in applying for a private loan.
- Submit the completed self-certification form.
- The lender with whom the student and /or co-signer apply will conduct a pre-approval credit investigation and notify the applicant(s) as to approval or denial. If approved by a lender for a private loan, the student and co-signer will need to review the Master Promissory Note (MPN) for accuracy, sign it, and return it to the lender. However, most lenders offer an e-sign option online.
- Loan proceeds will be sent directly to Berry College. The proceeds will be applied to the student account to clear any balances. Any remaining funds will be mailed directly to the borrower.