Underwriting Private Student Loans: Considering the cost of the tuition fees, students end up using student loans to pay for their education. Thus, as a student you can pay for your education even when you are not financially stable.
With federal student loans, you are pretty much guaranteed to get a loan if you are attending an eligible school.
However, with private student loans comes an underwriting process. You may want to know what underwriting is all about.
What is Loan Underwriting?
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.
Loan underwriting is the process of a lender determining if a borrower’s loan application is an acceptable risk. When getting private student loans, you will be subject to some underwriting process.
The term underwriter originated from the practice of having each risk-taker write their name under the total amount of risk they were willing to accept for a specified premium. At this point let’s look at how to apply for and underwrite private student loans.
Processes of Private Student Loans Application and Underwriting
Here is the step-by-step process of the application and underwriting process for a private student loan.
1. Submit Necessary Information
Information you need to submit are as follows;
- Date of Birth.
- Social security number.
- Driver’s license or other state-issued ID number.
- Current home address.
- Phone number.
- Email address.
- Debt payments.
2. Submit Additional Documents
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.
Your bank statements might also help underwriters see how much you owe and what you pay each month on your obligations or spot any potential red flags, which relates to your debt-to-income ratio.
Also, you also need to share the schools you are applying to, how much you plan to borrow, and when you expect to graduate. Some lenders also allow a cosigner to your loan application.
3. The Approval Decision
Another step involve in processes of underwriting private student loans is the approval decision. Private Banks and lenders take the information you provide in your loan file and decide if they want to provide you with funding.
They pull your credit report and look at your credit score and also look at your cosigner’s credit report if you have one.
Lenders may also consider your potential earning power, along with your current income, to determine if there is a good chance you can afford your loan payments.
4. Accepting Loan Terms
After that, the next step in the process of underwriting private student loans is the acceptance stage. Once you have 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. They will also tell you what your monthly payment will be.
When you accept, you might have to complete a module or course designed to help you understand the debt you are taking on, as well as the consequences for missing payments or entering a student loan forbearance program.
5. School Certification
After you accept the loan terms, the lender then verifies the amount of the loan with the school. Note that in the process of underwriting private student loans, it is only after the school certifies the loan that 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 phase in the process of applying and underwriting private student loans is the disbursement phase. Rather than giving you the money to pay for school, some lenders send the funds straight to the school. This is called student loan disbursement.
The school receives the money and applies it toward your fees, and other expenses you pay to the school. Any remaining amount is then disbursed to you with the understanding that you will use it to pay for other expenses.
The next thing in the process of underwriting private student loans is repayment. When to repay the loan depends on your terms.
With private loans, you might be required to start repaying the debt while you are in school. Some lenders, though, let you defer your first payment until after you graduate.
In any case, at some point, you will have to start making payments. Be sure to make your payments on time to keep your credit from being negatively impacted.
8. Interest Rates
Interest rate is the next thing in the process of underwriting private student loans. The interest rate you receive on your private student loan can make a big difference in your repayment.
If you do not 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, you can get a lower interest rate and save money on the cost of your loan. Also, if you have a cosigner with a good credit history, it can help.
The Role of a Cosigner in Underwriting Private Student Loans
Please note that your cosigner is someone who agrees to take responsibility for your debt if you do not make payments.
Often, a cosigner is needed with private student loans because many students, especially undergraduates, may not have the chance to build a credit history. Without a credit report to detail their ability to repay, students often cannot qualify for private loans without a cosigner.
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.
How Is the Process Different for Federal Loans?
With federal loans, you do not have to worry about the underwriting process for direct loans. You apply for your federal loan using the Free Application for Federal Student Aid (FAFSA).
Here the government only looks at how much you need and what the cap, set by law, is. With federal loans, interest rates are set by Congress and fixed for the term of your loan. Your credit score is irrelevant when it comes to how much you can borrow.
The only exceptions are federal PLUS loans. These loans can be taken by parents and graduate students to help cover costs. They have fixed interest rates as well, but there is an underwriting process of sorts.
Comparing Student Loan Underwriting with Other Loans Underwriting
While the underwriting process is reasonably thorough with student loans, it is not as robust as, say, mortgage underwriting. With mortgage lenders, your collateral is considered, and your loan amount might be limited by the value of the asset.
However, home buyers usually have a down payment to put toward the cost of the home when they are working with a mortgage underwriter and loan officer to get a mortgage loan. On the other hand, student loans are unsecured, so there is no tangible asset to check.
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.
In conclusion, no matter what happens, the student loan underwriting process is an important part of the equation. However, it can make sense to fill out your FAFSA and get federal loans first, since they do not require underwriting.
It is advisable that you only consider turning to private student loans if you have exhausted your other options.