How Do Student Loans Work? Here Are the 8 Basic Steps!

If your savings, scholarships, and federal student loans don’t cover your college tuition, it’s time to consider private student loans. If you’re wondering “how do student loans work?” you’re definitely not alone. Therefore, to save you time, we’ve put together everything you need to know getting a private student loan.

1. How to Choose a Private Student Loan Lender

Private student loans are offered by banks, credit unions, and other private financial institutions. It’s important to research all of your options before settling on one. Not all lenders operate nationwide. A smaller, local lender might have better options for you than a larger lender. Or vice versa! Be sure to thoroughly compare lenders’ pros and cons. There isn’t a one-size-fits-all answer, as different students will have different preferences and financial situations.

Check out College Raptor’s reviews of these reputable student loan lenders:

Unlike federal student loans, private student loans do not have standard interest rates or loan terms. Every lender has their own rates and other conditions, which is why it is important to do your homework before signing any agreement.

These are some of the things to find out when choosing the best private student loan for you:

  • Interest rates
  • Repayment terms
  • Whether or not you have the option to prepay the loan while still in school
  • Origination or administration fees
  • Whether or not you need a cosigner to borrow money if you haven’t built your credit history

Comparing different lenders’ rates and other loan conditions will help you shortlist a few that best fit your needs and your lifestyle. Once you’ve identified the best lender for you, the next step is to apply for the loan.

2. How to Apply for a Private Student Loan

You can apply for most private student loans online. You just fill in the information that they ask for in their application form and submit it.

Before you start, make sure you have this information handy to fill in the application form:

  • Personal information – date of birth and Social Security number
  • Contact details – phone number, email address, postal address
  • College/degree details – which college you’re attending, the degree you are considering, cost of attendance, and expected graduation date
  • Financial information – your bank account and routing number
  • Employment details — employer and current income
  • Loan information — How much money you wish to borrow

Before accepting your application, it’s mandatory that all private lenders show you a general disclosure document. This document advises you about student loans in general and informs you about your federal loan options. Read through the information, click ‘submit,’ and they’ll review your application.

3. The Credit Approval Process

Every lender uses their own specific criteria to determine whether you are a high or low risk borrower. To do this they check your credit history, annual income, outstanding debts, and other factors. This step can take anywhere from 15 minutes to a couple of days depending on the lender.

After reviewing your application, the lender will let you if you are approved, denied, or eligible with a creditworthy cosigner.

‘Eligible with a creditworthy cosigner’ means you aren’t approved to borrow money on your own credit history. But you can get approved if you have a creditworthy cosigner who agrees to be responsible for the loan in the event that you (the borrower) can’t pay it back.

4. It’s Time Now To Choose Your Loan Options

After you’re approved, you’ll specify the type of loan you want. Some choices you will have to make regard:

This is an important step, because our choices will determine your monthly loan payments and the total cost of the loan.

Making the right choices is crucial so give yourself plenty of time to do this. It’s advisable to check the lender’s website, explore your options and do your calculations in advance. This will empower you to make the right decision when your approval comes through.

5. Accept Your Loan Terms & Sign the Agreement

After you’ve chosen your loan options, the lender will draw up an agreement for you to sign. Signing this agreement implies that you have understood the terms of the loan and agree to them. Once you sign it, you cannot get out of it without consequences. Before you sign the agreement, make sure you read through it and understand what you are agreeing to.

Don’t understand something? Ask the lender to clarify what that means.

Don’t feel comfortable agreeing to a certain term? Ask the lender if there are any other options.

Most lenders allow borrowers to sign their loan documents electronically so there’s no need to print and mail anything.

6. Wait for School Certification

Many schools (but not all) will require a student loan to be certified. After you’ve signed and submitted your loan documents, the lender will send the details to your school as part of the certification process. This is to verify the details you’ve provided regarding your enrollment status, anticipated graduation date, and the school’s calculated cost of attendance.

This process takes on average about 7 to 10 days. Your school may certify the loan as is if all the details are right or not certify the loan if there is an inaccuracy. Alternately, they may certify the loan with a lower loan amount if the current amount exceeds the maximum cost of attendance.

However, if any changes are made to the loan amount, you will need to sign a new agreement with the corrected loan amount.

7. How The Loan Gets Disbursed to Your School

Different schools have different policies on how funds are transferred. However, most will take the loan funds directly and take what they need for tuition and fees. Then the rest will be sent to you, the student. If you’ve taken a loan for multiple semesters, the lender will only disburse the amount you need for the immediate semester. The remaining amount will then be disbursed only when you’re ready to start the next semester. You have to remember that interest begins to accrue as soon as the funds are disbursed. Transferring only what you need at the time helps to lower the overall cost of the loan.

8. The Loan Is Disbursed: Now What?

Once the loan is disbursed, you are responsible for keeping track of it and making your payments on time. If, at any time, you fear you may have a problem making the payments, don’t try to duck the issue. It won’t help. Instead, speak to your lender and be honest about what the problem is. Your lender will help you find the best solution for your circumstances.

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