Private Student Loans Guide: Everything You Need to Know

When you’ve tapped federal student aid and still have college costs to pay, private student loans can close that gap.
Last updated Jan 21, 2020 | By Elyssa Kirkham
Man using private student loans

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When looking at college costs, it can feel like you’ll never scrape together enough funds to pay them all.

As you research options, you might wonder if private student loans could be the answer. To know for sure, you’ll need to know about how private student loans work and when they’re a smart tool.

Here, we cover everything you need to know about private student loans.

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What are private student loans?

Private student loans are educational loans that are originated and funded by private lenders or banks. To get private student loans, a borrower must apply directly with a lender and meet borrowing requirements to get approved for the loan.

Some of these standards are simple to meet, such as proving the student’s enrollment in an eligible school program. Others could be tougher for college students, such as having good credit or being employed with a stable income.

Private student loan costs also vary between student lenders. A higher credit score will result in lower interest rate offers on private student loans. Other factors that affect private student loan rates include some terms of the student loan, the lender’s pricing model, and market benchmarks for interest rates.

Repayment terms can also vary, typically between a period of 5 to 20 years, with a common repayment period of 10 years. Many private lenders also offer in-school deferment that postpones payments while the student is still enrolled in college.

Private student loans vs. federal student loans

To get a better understanding of private student loans and whether they could be a good borrowing option for you, it can be helpful to compare them to federal student loans.

As the name suggests, federal student loans are originated and funded by the federal government to eligible students.

Student loan eligibility

You won’t need good credit — or any credit — to apply for and receive most types of federal student loans, or to qualify for better rates. You simply need to submit a Free Application for Federal Student Aid (FAFSA) and meet the eligibility requirements.

Private student loans, on the other hand, have credit and income requirements that many college students can’t satisfy on their own. As a result, 92% of private student loans originate with a cosigner to help the student qualify, according to the September 2019 MeasureOne Private Student Loan Report.

Student loan rates and fees

Federal student loan interest rates are set based on the type of loan borrowed and are adjusted annually. All students who take out a Direct Unsubsidized Loan in the same school year are charged the same rate, for example.

Another difference in cost could be student loan origination fees. While federal student loans always have an origination fee, many private student lenders don’t levy this fee.

Repayment plans and protections

Most private and all federal student loans provide in-school deferment. But other repayment options and protections can vary widely. Federal student loans provide clear and substantial benefits to borrowers in repayment that private student loans usually don’t offer.

Federal student loans guarantee access to a range of repayment plans, including income-based options. You also get certain protections like the right to defer or forbear payments under certain circumstances, such as financial hardship or job loss.

Some federal programs even offer student loan forgiveness for qualifying borrowers, but there’s no matching offers from private lenders. Lastly, while you’re guaranteed student loan cancellation for death or permanent disability on federal student debt, some private student loans offer similar protections, but not all.

Here’s an overview of some key differences of private student loans versus federal student loans.

Private student loans Federal student loans
Who lends the money? Loans originated by a private organization such as a bank or lender Loans originated and funded by the federal government
Eligibility Must be a student or borrowing on behalf of one, and have a positive credit history and established income Must be a student eligible for federal student aid, or a parent of an undergraduate student eligible for federal student aid
Repayment options Repayment and deferment options vary by lender; most provide at least limited in-school deferment Range of repayment plans, including income-driven options; in-school deferment; protections such as deferment and forbearance
Interest rates Fixed and variable rates available; fixed rates start around 4% and range up to 12%; variable rates range from around 3% up to 11% For the 2019-20 school year, fixed rates of 4.53% for undergraduate Subsidized and Unsubsidized Loans; 6.08% for Direct Unsubsidized Loans for graduate and professional students; 7.08% for Direct PLUS Loans
Tax benefits Interest paid on private student loans may be tax deductible Interest paid on federal student loans may be tax deductible
Loan limits Up to 100% of the student’s cost of attendance, varying by lender Annual limits of $5,500 up to $20,500 for combined Direct Subsidized or Unsubsidized Loan balances; Up to 100% of cost of attendance for PLUS Loans; aggregate loan limits also apply

When to consider private student loans

Federal student loans provide accessible and affordable funding for millions of college students. But in some cases, federal student loans might fall short of meeting all students’ needs — and private student loans can fill those gaps.

Here are some situations in which it could be worthwhile to consider private student loans:

  • You (or your cosigner) has great credit. If you’re choosing between a federal loan or a private student loan, it could be time to consider the latter. Some borrowers might be able to leverage good credit to get a private student loan rate that’s below those offered on federal loans.
  • You’ve maxed out federal student loans. It’s not uncommon for students to hit the annual or aggregate limits on federal student loans — and still have costs to pay. In these cases, private student loans can provide a way to borrow additional funds to cover those remaining educational expenses.
  • You’ve become ineligible for federal student aid. There are specific requirements to maintain eligibility for federal student aid, and if you lose that eligibility you’ll lose access to federal student loans. In this case, private student loans can provide a backup option to get funding for school when needed.

Where to get private student loans

Because the terms and features of private student loans depend so much on the lender you choose, it’s important to compare your options carefully.

Here are a few places to start your search for the right private student loan for you:

  • Banks such as Wells Fargo and Citizens Bank offer private student loans. You can also check with your current bank for student loan options, as well.
  • Credit unions are not-for-profit financial institutions that can be a low-cost option for private student loans. You can also use tools such as College Ave and LendKey to get connected with student loan offers from credit unions and community banks.
  • Online lenders provide accessible private student loans at the national level for students and their parents. Sallie Mae is perhaps the most well-known online private student loan provider. Others include SoFi, Earnest, and CommonBond.

As you shop for loans, compare the different costs and features that each loan has. Research starting APRs, or see if the lender offers rate quotes through a soft credit check to compare what the lender could offer you.

If you’re planning to apply with a cosigner, find out whose credit the lender will base rates on. Citizens Bank, for example, uses the higher credit score to set rates — giving borrowers a better chance to pay less.

Lastly, check out additional terms, such as a range of in-school deferment options. Sallie Mae has three options to pay student loans, including making interest-only monthly payments.

How to apply for private student loans

When you’ve selected a student lender and you’re ready to apply, what’s next? Most lenders provide an online portal through which you can easily apply for a student loan.

Here’s the type of information you might be asked to provide:

  • Contact and Identification: Your name, phone number, address of residence, and Social Security number
  • Education: The college you’re attending, your enrollment status, the degree you’re pursuing, and what year you are in school
  • Student aid: The loan amount you’re requesting, as well as other student aid you’ve already received
  • Employment: Your employer, employment status, and income
  • Financials: Bank account details and monthly costs, such as mortgage or rent
  • Cosigner: Your cosigner will need to provide similar details for themself, as well

Once you submit your loan application, and your cosigner’s portion of an application if you have one, the lender will process it. They’ll review the information, check your credit, and evaluate your application.

If you qualify and are approved, the next step is to accept the loan offer and sign a loan agreement. Review this document carefully to be sure you know exactly the terms you’re bound by.

Student loan refinancing

Private student loans aren’t just for in-school students. They can also help borrowers with existing debt to refinance student loans.

If you have expensive federal PLUS Loans or private student loans, refinancing can give you the opportunity to lower interest rates — in turn lowering monthly payments and total interest costs.

Refinancing can also help if you have private student loans with high monthly payments. It could reset the amortization and stretch repayment out over a longer period, lowering monthly costs. This can provide relief from costly payments, but keep in mind that it’s likely to raise the total interest paid over the life of the loan.

Like in-school private student loans, refinancing requires good credit and sound financial background, however. Not everyone will get approved to refinance student loans, or be offered student loan rates that beat out the current rates.

Private student loans FAQs

How do you qualify for private student loans?

To get approved for a private student loan, you’ll need to meet a few borrower requirements. First, lenders like to see a positive credit history and a good credit score. Next, it helps to be employed with a higher income, relative to the debt you’re taking on. Lenders are also likely to consider the burden of existing costs such as your rent or mortgage.

Unfortunately, many college students won’t meet these requirements. At least, not without a little help. If a student doesn’t meet these borrowing requirements, they should plan to apply with the help of a cosigner who does.

How much private student loans can I get?

Most private lenders will let you borrow up to 100% of your cost of attendance. Your cost of attendance is calculated as the total of all qualifying educational expenses, after taking out other student aid that’s already granted.

Some lenders do set a limit on the total balance of student loans it will extend to a student, as well.

Are private student loans bad?

Private student loans aren’t an inherently bad idea. When used wisely, they can be a way to close gaps between available student aid and the costs of college.

But like any other form of debt, private student loans can become burdensome if you borrow more than you can afford. The lender you select is also important, as this determines so much of your private student loan costs and experience in repayment. To avoid any regrets, seriously weigh your options before taking out a private student loan.

How quickly can you get a private student loan?

Once you submit a private student loan application, most lenders will let you know if you were approved within a week. The process to get the private student loan processed and disbursed to your college, however, can be a bit lengthy. It can take about 2-4 weeks for your student loan to be fully processed.

Can I get a private student loan with bad credit?

Yes — if you apply with the help of someone who has good credit. This cosigner agrees to repay the student loan if you fail to, providing an extra guarantee on this debt. This lowers the risk to the lender and as a result, they’re more likely to approve your application and give you a private student loan.

While private student loans can make sense in some situations, you should still limit loan balances and only borrow what you need to keep student debt affordable.

Overall, having more options can help you find the right fit for you. Keep in mind your own situation and goals, and look for ways to balance the need to cover today’s expenses with the future costs of repaying that debt.

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