Student Loan Underwriting: If you are schooling with the help of a loan, then you will agree to this. The cost of tuition increasing each year has negative effect on students. The majority of college students end up using student loans to help foot the cost of schooling.
It is important you know this too. You can look for scholarships and save up as much as possible. However, you might still have a funding gap. This is where applying for student loans come in. Please note this. With federal student loans, you are guaranteed to get a loan. That is, if you are attending an eligible school.
However, with private student loans there is an underwriting process. This can be similar to mortgage underwriting. Also, it’s similar to underwriting for an auto or personal loan. However, there are some differences as well.
What is Loan Underwriting?
It is important you know what underwriting is first. Underwriting is the process through which an individual or institution takes on financial risk for a fee. The risk most typically involves loans, insurance, or investments.
When lenders try to decide if you are a good risk before making a final decision, they take you through an underwriting process. This process is designed to determine the likelihood that you will be able to repay your loan.
Loan underwriting is the process of a lender determining if a borrower’s loan application is an acceptable risk. With the private student loan underwriting process, your school choice and major might also be considered. This is unlike a mortgage application.
Private Student Loan Application and Underwriting Process
It is important you bear this mind. When getting private student loans, you’ll be subject to the underwriting process. This is much like you would be if you wanted to borrow using other types of debt.
Furthermore, you might also be asked to upload additional documentation, such as:
Copies of documents that substantiate your claims. For example, tax returns and pay stubs.
Along with bank statements. These can help loan underwriters verify your income.
Also, your bank statements might help underwriters. It can help them see how much you owe and what you pay each month on your obligations. Can also help spot any potential red flags relating to your debt-to-income ratio.
When applying for private student loans, you also need to share which schools you’re applying to. As well as, how much you plan to borrow, and when you expect to graduate. Some applications ask for your planned major as well.
Finally, most lenders also allow you to add a cosigner to your loan application. This person shares the responsibility for repayment and his or her credit will be considered in the underwriting process.
How Your Request is Granted
It important you know this. Private banks and lenders take the information you provide in your loan file and decide if they want to provide you with funding. Also, they pull your credit report and look at your credit score. This is to see if you have a good track record with making payments on your debt. They also look at your cosigner’s credit report, if you have one.
Lenders may also consider your potential earning power. Also, they consider your current income. This is to determine if there’s a good chance you can afford your loan payments during school and when you finish.
If the private student loan provider thinks you’re likely to be able to afford payments, you’ll be approved for your loan. On the other hand, if the lender is uncomfortable with your current credit situation or if they aren’t sure about your income, you might be told no.
What to do Next
Accepting Loan Terms
Once you’ve been approved, it’s time to accept loan terms. Your lender will typically give you a few offers with different repayment terms and interest rates. Also, please inquire what your monthly payment will be. Furthermore, consider the offer and decide if it makes sense to accept.
When you accept, you might have to complete a module or course designed. This is to help you understand the debt you’re taking on. Also, it is to help you understand the consequences for missing payments.
Furthermore, it is to help you understand consequences for entering a student loan forbearance program. Please pay attention if there is this type of counseling offered. This is because it will help you better prepare for the future.
After you accept the loan terms, the lender then verifies the amount of the loan with the school. Your school certifies the loan amount. Please note. It might be for less than you’re approved for.
Also know that, only after the school certifies the loan will the funds be disbursed. You can cancel your loan any time before the funds are sent to your school. So keep that in mind as you continue to look for ways to pay your costs.
The next thing is disbursement. Rather than giving you the money to pay for school, lenders do this. They send the funds straight to the school. This is called student loan disbursement.
The school receives the money and applies it toward your costs for tuition, fees, and other expenses you pay to the school. Any remaining amount is in turn disbursed to you. This is done with the understanding that you’ll use it to pay for expenses related to getting your education.
When you start repaying the loan depends on your terms. With private loans, you might be required to start repaying the debt while you’re in school. Some lenders, though, let you defer your first payment until after you graduate.
In any case, at some point, you’ll have to start making payments. Be sure to make your payments on time. This is to keep your credit from being negatively impacted.
Please always bear this in mind. The interest rate you receive on your private student loan can make a big difference in your repayment. If you don’t have a high credit score, you might pay a higher rate. This can lead to repaying more total over the life of your loan.
If you have a good credit report and score, or if you have a cosigner with a good credit history, you can get a lower interest rate and save money on the cost of your loan.
Why You May Need a Cosigner
These are some of the reasons you may need a cosigner. Your cosigner is someone who agrees to take responsibility for your debt if you don’t make payments.
Often, a cosigner is needed with private student loans because many students, especially undergraduates, haven’t had the chance to build a credit history. Without a credit report to detail their ability to repay, students often can’t qualify for private loans without a cosigner.
Also, because your cosigner is agreeing to take responsibility for paying the loans, their credit score and other information will be considered during the underwriting process. If they have good credit and a good income, you can get a good interest rate on your loan.
Student Loan Underwriting vs. Other Loan Underwriting
While the underwriting process is reasonably thorough with student loans, it’s not as robust as, say, mortgage underwriting. With mortgage lenders, your collateral (the house you buy) is considered, and your loan amount might be limited by the value of the asset. There are also other differences any way.
Also, student loans are unsecured, so there is no tangible asset to check. However, when someone is getting a mortgage loan approval, their interest rate is determined in many of the same ways as private student loans.
Their mortgage payments can be lower however, if they make a bigger down payment. Some home loan borrowers may opt to have their closing costs including in the loan itself.
In a Nutshell
In conclusion, no matter what happens, the student loan underwriting process is an important. However, it can make sense to fill out your FAFSA and get federal loans first since they don’t require underwriting.
Only consider turning to private student loans if you’ve exhausted your other options and you still have a funding gap.