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When you’re applying for money to pay for college, experts agree that federal loans are usually the best way to go. They’re less expensive (especially for undergraduates) and more flexible than private student loans.
But if you need more money than you’re being offered in federal aid, a private student loan from a bank or other lender may be your best option to fill the gap. In the most recent numbers on private student loan borrowers, 43% turned to private lenders because they could not borrow any more in federal Stafford loans, according to the Institute for College Access & Success (TICAS).
But if you’re thinking of applying for a private loan, you should know that getting approved isn’t a slam-dunk.
“Lenders are focusing their money on the borrower who is least likely to default and most likely to be profitable,” said Mark Kantrowitz, financial aid expert and publisher of Savingforcollege.com. As a result, applicants who seem even a little risky might find themselves rejected for a private student loan.
Here are five reasons you might be denied for a private student loan:
1. Your credit isn’t good enough
Many undergraduate students — and some graduate students — don’t have a robust enough credit history to qualify for a private student loan. Or, if they do, their score might be too low.
Can you get a private student loan with bad credit? Possibly, but you might need a cosigner on a private loan application to get it approved. “About 90% of our private education loans are co-signed,” said Rick Castellano, a spokesperson for Sallie Mae.
Note, however, that using a cosigner can also cause problems of its own.
2. You’ve borrowed a lot recently
The Department of Education, guaranty agencies and other federal student lenders report your loans to the credit bureaus, as do most private lenders. As a result, future lenders are able to easily see how much money you’re borrowing and what your total debt load looks like.
Your debt-to-income ratio ideally needs to be 40% or less, though standards range from lender to lender. If you have a lot of debt and not much income, you’re a riskier bet, leading private lenders to reject your loan request.
3. You’re going into the ‘wrong’ field
“If you’re applying for private aid for a degree in a field that pays well, like a medical degree or in the sciences, and you’ve got a reasonably good credit background, you’re getting approved,” Kantrowitz said. On the other hand, if you’re pursuing a degree in a field that traditionally pays poorly — thus making it harder for you to repay a loan later — it’s a tougher call.
Keep in mind that your future earnings will also play into your likelihood of getting approved for student loan refinancing after you graduate. We definitely aren’t telling you to avoid pursuing your dreams, just to be careful about your debt burden if you’re entering a historically low-paying field.
4. You’re asking for too much
It could be that the private lender thinks your loan request is too high. “To ensure applicants borrow only what they need to cover their school’s cost of attendance, we actively engage with schools and require school certification before we disburse a private education loan,” Castellano said.
In this case, you might not get rejected, but the school might certify a lesser amount.
Also be aware that you can sometimes get approved for more than you actually need. If that’s the case, you probably shouldn’t use those extra student loan funds to cover the cost of decorating your dorm, grabbing coffee after class or bar hopping. The cost of using student loans to cover living expenses can take a heavy toll down the road.
5. You’re a freshman
If you’re only a year or two away from graduating, you’re more likely to get approved than if you still have four years of undergraduate schooling ahead of you. This is because, as Kantrowitz explained, “there’s less risk of you dropping out.”
Graduate students may also have an easier time getting a private student loan because they’re more of a known quantity — they even started to pay down debt and established themselves as less of a risk.
Why you might be denied for a private student loan (and what to do instead)
In all circumstances, experts feel you should weigh the costs and benefits of private loans carefully — and whether you need them at all. For one thing, 45% of private loan borrowers borrowed less than they could have in federal loans, according to TICAS. So make sure you’ve exhausted your federal loan opportunities before heading this way.
Private student loans can be harder to get than federal ones because they’re credit-dependent. Everything from existing debt and credit scores to how far you are into your education will play a role in whether or not your application is accepted.
But getting denied for a private student loan doesn’t mean that you’re out of luck when it comes to funding college. There are many other options, from racking up scholarships to finding a tuition-free school. You could even start with a low-cost or no-cost community college and then try to build your credit to qualify for a private student loan later on when you transfer to a four-year university.
Devon Delfino contributed to this report.