What is a Private Student Loan?
Private student loans are education loans that are offered by private lenders such as online lenders, banks, and credit unions. Unlike federal student loans, private student loans are not funded by the government. Private student loans often require a credit check and may require a cosigner, such as a parent or other creditworthy individual, to help secure the loan. They are typically considered more expensive than federal student loans. However, they may offer more flexible repayment options, such as the ability to defer payments or change your repayment plan.
How do Private Student Loans Work?
Private student loans are a type of installment loan you can use to pay for different educational expenses. Since these are installment loans, the primary borrower — typically the student or their parent — needs to make regular monthly payments on the loan until it's paid off. These payments usually include the principal balance and interest.
Some lenders will let the borrower postpone payments until they're out of school, or until their enrollment status drops to below part-time. However, interest charges could still accrue.
Unlike with other installment loans — like auto or personal loans —, private lenders do not usually disburse the money to the borrower. Instead, they provide it to the college or university for the institution to use as needed.
What Can Private Student Loans Be Used For?
Private student loans can be used for a variety of education-related expenses, such as:
- Tuition: Private student loans can be used to cover the cost of tuition for your degree program.
- Books and Supplies: Private student loans can help you pay for textbooks, lab fees, and other supplies required for your classes.
- Room and Board: Private student loans can be used to cover the cost of room and board if you are living on campus.
- Transportation: Private student loans can help cover the cost of transportation to and from school, such as gas, car payments, and public transportation.
- Personal Expenses: Private student loans can also be used to cover personal expenses, such as a computer, a new wardrobe, or other miscellaneous expenses related to your education.
Best Private Student Loan Lenders
Student Loan Types
Private student loans come in many forms. Here are the most common types:
- Undergraduate loans: These loans usually have a fixed annual percentage rate (APR) and a repayment term of five to 15 years. Loan amounts vary by lender but may be high enough to cover all academic costs.
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- Graduate or professional loans: These work similarly to undergraduate student loans, but you might need to be enrolled in a specific type of university or degree program to qualify. You may also need to start making payments while in school (unless the program requires a residency).
- Technical college or community college loans: Some lenders offer loans to individuals attending vocational college, technical training school, or community college. They’re primarily used to cover any gaps in financing.
- State-specific loans: Depending on your state of residence, you may be eligible for a state-specific loan program. These loans also come with set repayment terms. They may also have either variable or fixed interest rates.
- Parent loans: If a student doesn’t qualify for a loan on their own, their parent may be able to take one out on their behalf. The parent is then responsible for making payments. It may be possible to refinance the loan later under the student’s name.
- Bad credit loans: These loans can help students with poor credit or limited credit history fund their college education. They typically come with less favorable terms and rates, though.
Private vs. Federal Student Loans
Federal student loans and private student loans are both options for financing your education.
Many prospective students turn to federal financial aid — including federal student loans — before using private options. In fact, the U.S. Department of Education services several types of federal student loans to those pursuing higher education.
But federal funding isn’t always enough — which is where private loans come in. Private loans can bridge any gaps in funding, making it easier for students to afford the cost of education.
Federal and private student loans differ in many areas, however. That’s why it’s important to consider your options carefully before deciding on one. Here are the main differences between them:
- Loan purpose: Both options can cover academic costs, but private loans are sometimes more flexible.
- Requirements: Unlike federal loans, private loans are not typically based on financial need. Instead, they’re based on things like the borrower’s income, credit, and debt-to-income ratio.
- Term: Private loans usually have a repayment term of 10 to 25 years. This is longer than most federal options.
- Interest rate: Private student loans can have either a variable or fixed interest rate, while federal options are usually fixed.
- Lender fees: Certain private loans come with other fees, such as origination fees or prepayment penalties. Federal options are more regulated and may not come with these charges.
- Repayment options: Typically, you can postpone payments on federal loans while enrolled at least part-time in college. Private lenders may require you to start making payments immediately, though some offer flexible repayment options.
- Student loan forgiveness programs: Private student loans are rarely eligible for student loan forgiveness.
How to Get a Private Student Loan
Here’s the typical application process for private student loans:
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- Review your income and credit: Private student loans usually have stricter requirements than federal options. So, it’s important to check your credit and income situation before applying to make sure you qualify. The better your credit score, the better your rates and terms tend to be.
- Calculate what you need: Use an online calculator to determine how much you need to borrow, and only take out that amount.
- Compare private lenders: Check out several lenders to see what they offer — that is, their typical rates, terms, loan amounts, fees, and requirements. Also, see if they offer any special perks, discounts, or repayment options.
- Get a co-signer: Some lenders accept co-signers. This can be helpful if you need help qualifying for a loan at the best rates.
- Read the loan terms carefully: Review the terms and conditions of the loan before applying. Make sure you know what repayment options are available, too.
- Get prequalified: Some private lenders offer prequalification, which lets you check your personalized terms and rates without committing to a loan.
- Apply: After choosing a lender, complete their application process. With many private lenders, you can apply online. The lender will likely perform a hard credit check at this time, which can temporarily hurt your credit score.
- Wait for the decision: The lender will review your application and make their decision. If approved, they will either send the funds to you or to your school.
Pros and Cons of Private Student Loans
Any form of financing comes with its share of pros and cons. Here are the main ones with private student loans.
Pros |
Cons |
The loan amount may be enough to cover all of your college expenses |
Borrowers need good credit for the best rates and terms |
Potentially better rates and terms than federal loans |
Rarely eligible for student loan forgiveness |
Can bridge any financial gaps in college funding |
May incur interest right away |
May have more flexible repayment options |
Some lenders require borrowers to start making payments immediately |
Should You Get a Private Student Loan?
Although it’s usually a good idea to exhaust all federal funding options first, private student loans can be helpful in certain cases. You may want to consider getting one if:
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- You need additional funding (after federal aid) to cover your academic expenses
- You don’t qualify for federal financial aid (ex. you’re an international student or your family makes too much money)
- You have excellent credit or a reliable cosigner
- The FAFSA (Free Application for Federal Student Aid) deadline has passed for the year
- Your program or school is not eligible for federal financial aid
Average Private Student Loan Rates
Every private lender has its own rates and requirements, but here are some of the best private student loan lenders available:
Lender*
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Typical APR
|
Loan Term
|
Loan Amount
|
Fees
|
Recommended Minimum Credit Score
|
Credible
|
4.99% to 16.20% (variable)
3.65% to 15.91% (fixed)
|
5 to 20 years
|
Varies by lender
|
No prepayment penalties or origination fees
|
670
|
Sofi
|
5.16% to 13.07% (variable APR with autopay)
4.49% to 13.80% (fixed with autopay)
|
5 to 15 years
|
$1,000+
|
No fees
|
650
|
College Ave Student Loans
|
4.99% to 15.32% (variable APR with auto-pay)
4.44% to 15.32% (fixed APR with auto-pay)
|
5 to 15 years
|
Up to 100% of school-certified costs
|
No origination fee
|
650
|
Sallie Mae
|
Rates vary based on loan type
Ex:
5.87% to 16.20% variable for undergraduate loans
|
5 to 15 years
|
Up to 100% of school-certified costs
|
Depends on loan type
|
670
|
Discover Student Loans
|
6.12% to 15.37% (variable)
5.49% to 14.99% (fixed)
|
6 months to 15 years
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Up to 100% of college expenses
|
None
|
670
|
*Rates and requirements subject to change