Preparing for Private Educational Loans
To put yourself in a good position, you should prepare your finances by building strong credit and lowering your debt-to-income (DTI) ratio before applying.
1. Improve your credit score
A strong credit score is the primary factor in securing a favorable interest rate from a private lender. A good credit score is generally between 670 and 739, while scores over 800 are considered excellent.
- Keep credit utilization low. This is the ratio of how much credit you use compared to your total available credit. Aim for a ratio below 30%, as this is the second most crucial factor for your score.
- Pay all bills on time. Payment history is the most important factor in calculating your credit score. Set up automatic payments to avoid missed payments.
- Limit new credit applications. Every time you apply for new credit, a hard inquiry is placed on your credit report, which can slightly lower your score.
- Keep old accounts open. Closing an old account can shorten your credit history and potentially increase your credit utilization ratio.
2. Lower your debt-to-income (DTI) ratio
Lenders use your DTI ratio to assess your ability to take on new debt. It is calculated by dividing your total monthly debt payments by your gross monthly income.
- Aim for a DTI of 36% or lower. Most lenders prefer a DTI ratio of 36% or less to approve you as a reliable borrower.
- Increase your income or decrease your debt. To lower your DTI, you can either increase your gross monthly income or decrease your monthly debt payments. Paying off high-interest credit card debt is an effective way to lower this ratio.
3. Gather your documentation
Having all your information organized ahead of time can make the application process smoother and prevent delays. Typical documents you will need include:
- Personal information (e.g., driver's license, Social Security number)
- Proof of income (e.g., pay stubs, W-2s, or tax returns)
- Loan details (e.g., the amount you wish to request and the enrollment period you wish to use the loan for)
- School information (e.g., School Name, School Code, your enrollment dates)
4. Respond promptly to all communication/requests from lenders
5. Know your options for a co-signer
If you have a limited credit history, a co-signer can help you qualify for a loan and secure a lower interest rate.
- Understand the risks. A co-signer is equally responsible for the loan, and missed payments will negatively impact their credit score.
- Ask about co-signer release programs. Some lenders offer programs that allow you to release your co-signer after you've made a certain number of on-time payments.