Private Student Loans and ISAs

If you want to go back to school or you’re going to school for the first time, then you’re probably wondering exactly how to pay for college. Not everyone has bottomless pockets so you’re likely going to have to borrow money or determine your eligibility for free money. While there are many ways to cut the costs of education, you will still need to find a way to actually pay in full for your degree or program.  And while many people will take out federal loans, there may be a time when you’ve exhausted these funds and need to resort to other options. This is where private student loans can help you pay for your education costs. Additionally, an income share agreement, also known as an ISA, is another way to pay for school.

In this guide, we talk about private student loans and income share agreements, as well as additional ways to supplement your financing.  If you would like to learn more about paying for your education through federal aid, check out our complete guide to federal student financial aid programs.

Private Student Loans

Private student loans can be a great option to help cover the costs of college. It’s money that people can borrow from either a bank or privately funded company. These companies can set their own terms, and can accept or reject potential borrowers according to their lending requirements.

While this may be an attractive option, it’s important to exhaust your federal aid options before taking out a private loan. Unlike federal student loans, private loans don’t have some of the protections that you would normally find with government backed monies. 

Questions You Should Ask When Taking Out Private Loans

If you’ve exhausted all of your other financing options such as federal aid, your next best thing will be private loan. Asking the right questions upfront will save you headaches down the road when you start paying back your loan. You want to protect yourself so you don’t end up in a financial nightmare. Here are some questions you should ask before signing the dotted line:

What are the Re-Payment Terms?

Repayment terms are terms that the borrower agrees to as it relates to paying back the loan. There may be many ways to pay back your loan such as a standard plan and income-driven plans. Therefore, make sure you ask your loan provider to go over these student loan repayment options upfront. You will want to avoid any pitfalls should they not enroll you in the right loan repayment program. Some repayment terms might include:

• Timeline to start paying back your loan
• How long you have to pay off the debt
• Pre-payment penalties
• Interest-only payment options
• Missed payment penalties

Are you able to defer payment after graduation?

Deferment options should be included in the re-payment terms. Deferment typically refers to the time gap between when you graduate or complete the program and when you will be required to start paying back your loan. On average, lenders give borrowers 6 months to begin paying back their loan. 

Is there minimum credit score needed to take out a private student loan?

There will likely be a minimum credit score required to take out a loan. Your score, along with your income, will likely determine how much you can borrow and at what interest rate (more on that below)

Can you add a co-signer?

If you don’t make enough money or don’t have a long enough credit history (or any for that matter), you might need a cosigner. A cosigner acts as a safety net for the loan provider should you not be able to make payments. 

Are there fees built into the loan?

Most lenders will include an origination fee in your student loan. The total amount of money you will need to repay will include the principle amount, origination fee and interest rate. An origination fee is a fee that companies charge the borrower in order to process the loan application. These fees range from 1% to 6% of the principle loan amount. 

Will any school accept private student loans?

Most educational institutions will accept a private loan.  You can use a private loan to fund any type of education program including undergraduate and graduate degree programs, coding bootcamps, medical school, law school and career training programs. 

Do Loan Providers Fund Any Program?

While schools will typically accept any private loan, lenders may have restrictions on the types of educational programs they are willing to fund. Each loan provider has their own requirements and restrictions as to what type of program they will let you borrow money for. 

Lenders and Providers of Private Student Loans

Interest Rates for Private Student Loans

When you take out a private loan, you will most likely have to pay back the original amount, called principle, plus interest. Although rare, some companies may offer 0% financing. In order to qualify for interest-free loans, you will need to have a great credit score and agree to pay back the loan within set time period. Most people, however, will be obligated to pay interest rates as a result of taking out a student loan. You should have the option to choose between a fixed rate and a variable rate. Knowing which one is best for you will depend on your financial circumstances, as well as your understanding of financial markets.

Fixed Interest Rates for Private Student Loans

Fixed interest rates never change. They tend to be higher than the initial variable interest rate. With a fixed interest rate loan, you will pay the same monthly payment for the life of the loan. Having a consistent monthly payment is helpful when it comes to monthly budgeting and figuring out other financial obligations. It’s also highly favorable to other lending institutions. If you’re considering buying a house or car, those lending institutions will prefer seeing a fixed payment when calculating your ability to pay down the loan they may be lending to you.  

Variable Interest Rates for Private Loans

Variable rates can change at any moment. These tend to be lower than fixed rates but can change. Variable rates can increase upwards of 2-10 times higher than the fixed rate. You should make sure that your loan agreement includes a maximum interest rate. A max rate is the highest an interest rate can climb. Your interest rate can never go above that amount.

There are a few reasons the variable rate may change at any point. This includes market changes which can make your interest rate either increase or decrease. Another reason for a change would be missing a one or more monthly payments. The loan agreement will list all of the scenarios that can affect your variable interest rate during the life of the loan. 

Final Thoughts on Interest Rates

Fixed rates and variable rate both have appealing and unappealing qualities. Choosing one rate over another is a personal decision.  You should consider factors such as how much you can comfortably pay each month and the risk you’re willing take, And depending on your loan provider, you may be able to switch from fixed to variable and vice versa. 

Income Share Agreements (ISA)

What is an Income Share Agreement?

An income share agreement is a type of tuition payment deferral program. An ISA allows you to postpone paying your tuition until after graduation and you’ve secured a full-time job. Once you’ve secured a full-time job with a required minimum salary, you’ll begin paying back your tuition. The amount you will owe each month will depend on the ISA agreement. Typically, you’ll be required to pay a % of your income each month. For any month that you don’t meet the minimum salary requirement, you will not be obligated to pay. 

Who Offers Income Share Agreements?

ISAs have become a popular payment option with coding bootcamps. This is really the only type of education program that offers a deferred payment that’s tied directly to your income. 

ISA Requirements and Steps

In order to be accepted into an income share agreement program, you will likely need to meet and fulfill the following requirements:

• Apply to a coding bootcamp
• Apply for an ISA funding program during your application process
• Pay an upfront enrollment deposit
• Agree to payment terms
• Complete the Coding Bootcamp
• Get a Job
• Begin to pay back the tuition according to the terms

What are the benefits of an Income Share Agreement program?

Income share agreements are a great way to

• Defer payment until after graduation
• You only pay if you meet the minimum yearly salary requirements
• Monthly payments are directly tied to how much you make

Drawback to an Income Share Agreement program

Just like with everything in life, there are always going to be some drawbacks to what appears to be perfect. One example of this is the amount of money you will have to pay. The amount you pay back will exceed that actual total cost of the tuition. Interest is built into your payment terms.As a result, you’re stuck paying the interest, regardless if you can pay them back before the term ends.  Since the interest is built into the tuition program and you’ve already agreed to paying that amount prior to starting the bootcamp, you can’t attempt to pay what the program actually cost. The actual cost of the program is what you would pay if you were paying upfront. Typically, you will be paying in excess of $3,000 to $4,000 of the actual coding bootcamp tuition cost.

Find out more about coding bootcamps and their advantages by checking out our complete guide to online coding bootcamps.

Ways to Supplement Your Private Student Loans

There are a few ways that you can supplement any of the above financing options. The options listed here is tuition reimbursement and scholarship programs. The scholarship programs listed below are different from the scholarships listed on the federal aid website. 

Tap into Your Employer

Tuition Reimbursement is one way to help with the costs of college. We talk a lot about this on the Pathways website…and for good reason. Tuition Reimbursement is a great way to help pay for your education, and most people overlook this employment benefit. You may already be working for a company that offers this benefit and not even know it. Or you may be looking for a job. If you’re currently in the market for a job, is tuition reimbursement as an employee benefit high on your list? You’re not alone if you haven’t considered this important when searching for a job. In fact, less than 10% of employees actually take advantage of their company’s reimbursement package. If you have ever thought about going back to school or going to college for the first time, find out if your current employer or potential employer offers this benefit. 

Search for College Scholarships

College scholarships are another great way to supplement your financing. You can find different scholarship programs through different organizations or by checking on different school websites. Many colleges offer scholarships directly to students who meet certain criteria and who enroll in their school. Some colleges may even offer scholarships at the academic department level. 

For more information on how to pay for school or how to cut and reduce costs, check out our financial planning blog for more tips and resources.