A Complete Guide to Private Student Loans
Key Takeaways
- Private student loans can help you pay for college but have higher interest rates and fewer benefits than grants, scholarships, and federal loans.
- Fixed interest rates do not change over the life of the loan, but variable interest rates can increase without warning.
- Refinancing a federal loan into a private loan can make you ineligible for certain federal benefits.
With college costs rising, it’s no wonder students need extra financial help to reach their goals. While grants and scholarships can greatly reduce out-of-pocket expenses, they’re not guaranteed to cover the full cost of college.
Private student loans can help bridge this gap in college costs, but they come with considerable risks. For example, a recent congressional analysis led by Sen. Elizabeth Warren, a Democrat from Massachusetts, found that “although the private student loan market currently accounts for approximately 8 percent of student loan debt, it represents more than 40 percent of student-loan-related complaints submitted to the Consumer Financial Protection Bureau (CFPB).”
The following guide explains what private student loans are, their potential benefits and risks, and how to navigate the application process.
What Is a Private Student Loan?
Private student loans are a type of loan that can help you cover the costs of college. Unlike federal student loans, which are funded and disbursed by the federal government, private student loans are issued by banks, credit unions, and similar lenders.
Federal Direct Loans — encompassing Direct Subsidized, Unsubsidized, PLUS, and Consolidation Loans — are the most common type of student loan because they are generally more advantageous to borrowers. For example, federal loan interest rates are typically much lower than those for private student loans, and they offer a variety of repayment options and federal protections such as forbearance periods and forgiveness programs.
By comparison, private student loans tend to have higher interest rates, fewer repayment options, and stricter application requirements. For example, you may need to meet a specific credit score or income level to qualify for private student loans. Some lenders may even require a cosigner.
Why Take Out Private Student Loans?
If you’ve exhausted all other options for paying for college, it’s understandable to look at private student loans. Here are some reasons why you might need to take out a private student loan.
Your financial aid doesn’t cover the full cost of attendance. Even after grants, scholarships, and federal loans, if you still have a gap in education expenses, you could use private loans as supplemental funding up to the school-certified amount, which is the estimated cost of attending the college minus all federal aid received. You can verify this information with your school’s financial aid office.
You’ve reached federal student loan borrowing limits. Federal Direct Loans have annual and aggregate borrowing caps. If you reach those limits and still owe for school costs, a private student loan may be one of the few remaining borrowing options.
You’re not eligible for federal aid. Some students consider private loans if they aren’t eligible for federal aid. Federal eligibility can depend on multiple factors, such as citizenship and eligible noncitizen status, and being enrolled in school at least half-time.
What Are the Risks of Private Student Loans?
Private student loans can help you pay for college, but they also carry more risk than federal student loans.
Borrowing without strong credit can mean high interest rates. The best private loan rates usually go to borrowers who have excellent credit or a credit-worthy cosigner. Since many students have limited credit history, they often end up paying higher interest rates than they would with federal loans, making the loan more expensive over time.
Private student loans have limited safety nets for borrowers. Federal loans typically offer protections such as income-driven repayment plans and the option to pause payments through deferment or forbearance. Private lenders may offer hardship options, but they’re not standardized and not guaranteed, so you may have fewer ways to get relief if money is tight.
Additionally, according to Sen. Warren’s report, students who borrow from private lenders may not have protections against schools that close down or defraud them.
Choosing variable interest rates can lead to much higher total costs. A variable interest rate can change over time, while a fixed interest rate stays the same for the duration of the loan. All federal student loans have fixed interest rates, which make monthly payments stable and predictable. However, private lenders offer both fixed and variable interest rate options. If you choose a variable rate because it’s lower at the beginning, you should know it can increase at any time, which could raise your monthly payment and mess up your budgeting.
How to Apply for Private Student Loans: 4-Step Guide
You’ve filled out the FAFSA, applied for grants and scholarships, and pursued federal student loans. But you still need funds for college. Private student loans may be the answer. Here’s how to apply.
Step 1: Research Your Loan Options
The first step is to research loan options. You can go online to private lenders and independent analysts to compare private student loan interest rates, repayment plans, and monthly payments. With this information, you can figure out how much your loan will cost you in the long run so you can start budgeting.
Make sure you can add a cosigner if a loan requires one. It helps if the cosigner has a good credit score (typically, the better the credit score, the better the interest rate you’ll get). Additionally, find out whether you can remove the cosigner after you’ve made a certain number of payments. This reduces the cosigner’s risk and establishes your financial independence.
Finally, ask about any special features or benefits, such as autopay discounts or interest-only payments during school, that could reduce your total loan costs.
Step 2: Check Your Eligibility
To qualify for a private student loan, you must attend an eligible school at least as a half-time student and use the loan money to pay for educational expenses only.
In general, to qualify for private student loans, you must meet the following requirements:
- Be at least 18 years old
- Have a high school diploma or GED certificate
- Have a Social Security number
- Be a U.S. citizen or eligible noncitizen
You must also meet the lender’s credit and income requirements. Even if you have insufficient or poor credit history, you can get a cosigner, such as a parent or guardian, to help you meet all requirements.
Step 3: Gather All Required Information and Materials
To apply for private student loans, you’ll need to provide personal information, including your (and your cosigner’s) Social Security number, birthdate, and home address. You may also need to submit proof of employment and income.
Furthermore, you may be asked to provide financial information such as your assets, rent or mortgage payments, and tax returns.
Take some time to gather all the personal information and relevant documents you and your cosigner will need to fill out the loan application.
Step 4: Submit Your Application
Once you’ve completed your private student loan application, your financial institution will contact your school to verify your information and eligibility, as well as determine the cost of attendance. It’ll then process the student loan and notify you about approval, the loan amount, and the disbursement of your money.
Can You Refinance Private Student Loans?
Refinancing means replacing your current loan (or loans) with a new one; the old loan is paid off and replaced by a new loan you repay going forward. Yes, you can refinance private student loans, but it’s important to contact your lender to understand all available options and the best time to refinance.
Refinancing private student loans may allow you to:
- Lower your interest rate (if your credit or income qualify)
- Switch rate types (for example, from variable to fixed)
- Change your repayment term (a shorter term to pay off loans faster, or a longer term to reduce monthly payments)
- Simplify payments by rolling multiple loans into one — and, in some cases, release a co-signer depending on the lender’s terms.
While you can technically refinance federal student loans, you can only do it by converting them to private student loans. This is usually not recommended because you lose access to special programs designed to help federal borrowers, such as loan forgiveness and income-based repayment plans. Private lenders do not offer these programs.
If you have multiple federal student loans and want to simplify your payments, consider a Direct Consolidation Loan. Consolidation means taking out a new federal loan that combines several federal loans into a single payment.
Frequently Asked Questions About Private Student Loans
You can get private student loans from financial institutions like banks, credit unions, and other for-profit lenders. Shopping around matters because lenders vary on interest rates, repayment terms, and whether you’ll need a co-signer. After you apply, the lender typically works with your school to confirm eligibility and the loan amount.
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