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Private Student Loans

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 in hopes of being approved.

Regulation Z requirements

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, an institution offering private loans for postsecondary educational expenses (i.e. McKinstry Loans, Health Profession Student Loans, Robert Wood Johnson, etc.) 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 institution before the loan may be approved. If you need assistance completing the form, please visit the Office of Student Financial Services at UMMC.

Last, an institution 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 institution may disburse the loan funds.

Below is an example of what to expect if you apply for a private loan:

• Apply online (you will receive an application disclosure statement)
• If approved for the loan, you will be provided an approval disclosure statement
• Complete the self-certification form and return to the institution
• Finally, you will receive a final disclosure statement (allowing you up to 3 days to cancel the loan before it is disbursed)

If you have any questions related to the new regulations, visit our office.

What are private student loans?

Private student 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 student loans will need co-signers on the application in order to get approved. While rates and repayment terms on private loans typically aren’t as solid as those offered on the various federal students loans, using private student loans are 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 student 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 UMMC which occurred in a prior academic year.

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 out of pocket, then you will need to consider applying for a private student loan to cover the prior year balance.

Do I need a co-signer to apply for a private student loan?

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 student 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 student 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.

How do I process a private student loan application?

• Make sure you have completed the FAFSA and accepted your annual maximum in federal student Stafford 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.
• 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 student loan, the student and co-signer will need to review the Master Promissory Note (MPN) for accuracy, sign, and return to the lender. However, most lenders offer an e-sign option online.
• Loan proceeds will be sent directly to UMMC. The proceeds will be applied to the student account to clear any balances, and remaining funds will be direct deposited or mailed directly to the borrower if direct deposit is not set-up.

We recommend you request a free copy of your credit report from each of the three credit bureaus (Equifax, Experian and TransUnion) as you are entitled annually by law. While you must pay a fee to each of the three credit bureaus to obtain your actual credit score(s), it is important to at least check your credit report(s) annually for any errors or illegal use.