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What is a private student loan?

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When grants, scholarships and federal student loans aren’t enough, you can turn to private student loans to cover the cost of higher education. These loans originate from banks and other private financial institutions, and they can help cover expenses like tuition, fees, housing, books and more.

While there are some benefits to using private student loans, they’re not the right choice for everyone. Here’s what to know before applying.

What is a private student loan?

Private student loans are loans that come from private lenders, like banks and credit unions, rather than from the federal government. Each lender sets its own criteria for eligibility, including credit scores and income. This makes private student loans harder to qualify for than federal loans; you’ll generally need good or excellent credit to get a private student loan, whereas most federal student loans don’t even require a credit check.

However, private student loans are often more customizable than federal loans. You may be able to choose between a fixed and variable interest rate, and you can usually select among several different repayment timelines. If you have great credit, you could score an exceptionally low interest rate.

Loan amounts

One benefit of private student loans is that many lenders let you borrow up to the full cost of your education. However, this policy varies by lender, your credit score, your major and whether you have a co-signer.

Some lenders cap the total loan amount with a lifetime loan limit, which could depend on the type of private student loan you’re applying for. For example, with Citizens Bank, undergraduates and most graduate students may borrow an aggregate $150,000 in student loans. That limit rises to $225,000 for MBA and law degrees and up to $250,000 for health care degrees.

Repayment options

Many private student loan lenders have the same grace period as federal student loans, which is six months after graduating, dropping below part-time status or leaving school. They also have a variety of repayment terms, often ranging from five to 20 years.

But some lenders are more flexible than others when it comes to repayment timelines. For example, College Ave lets undergraduate borrowers choose among repayment terms of five, eight, 10 or 15 years, while Discover offers only a 15-year term.

One important detail to keep in mind is that you can typically refinance your loans after you graduate. This can be a good option if you don’t like the repayment plan you’re on and want to secure a lower monthly payment or different repayment timeline.

Eligibility requirements

All lenders have their own internal guidelines for which borrowers they accept and which borrowers get the lowest interest rates. Generally speaking, lenders typically look for:

  • Good credit: The better your credit score, the more likely you are to qualify for private student loans at the lowest interest rate available. If your credit score is too low, you may need a co-signer.
  • High income: Lenders want to see if you’re in a place to comfortably repay your student loans. You or your co-signer will need to prove that you have a solid income to pay your student loans.
  • Low debt-to-income ratio: If you have a lot of debt relative to your income, lenders will be more hesitant to lend you money. Try to aim for a debt-to-income ratio of less than 50 percent.
  • Citizenship: Many lenders require you to be at least 18 years old and have U.S. citizenship. International students are eligible with some lenders as long as they have a U.S. citizen co-sign their loans.
  • Eligible school or program: Lenders may check out your school to verify your enrollment, and some only work with certain schools. They will also check your total cost of attendance minus other aid to make sure that you’re not borrowing more than you legitimately need. If you’re not currently enrolled or accepted into an eligible program, you might not qualify for private student loans.

Interest rates

Federal student loans set interest rates before each academic year, and all borrowers who apply within a given academic year receive the same fixed interest rate. Private lenders, on the other hand, are free to set their own interest rate ranges and change those rates regularly. Interest rates depend on several factors, including your credit score, loan amount and chosen repayment term. Private student loan rates typically range from around 1 percent to 14 percent.

One other key point about private loans is that they generally offer borrowers the choice between a fixed interest rate and a variable interest rate. Starting interest rates for fixed-rate loans are typically higher than starting interest rates for variable-rate loans. However, if you choose a fixed rate, the rate you receive upon accepting your loan is the rate you’ll pay for the duration. If you choose a variable rate, the rate you receive could change regularly, potentially making your loan more expensive over time.

Pros and cons of private student loans

Private student loans come with many benefits, but you should also consider the downsides before signing up.

Pros

  • High loan amounts. Federal student loans have annual caps that can be as low as $5,500 for undergraduate students. After you max out your federal student loans, you may still need money to cover additional costs. Private student loans can help to fill in the gaps.
  • Quick application process. While federal student loans require borrowers to fill out the Free Application for Federal Student Aid (FAFSA), private student loans do not. You can apply for most private student loans online in just a few minutes without providing nearly as much information.
  • Available for part-time college students. You have to be enrolled in school at least half time to qualify for federal loans, but some private lenders will let you borrow money if you attend school less often than that.
  • Competitive interest rates. Student loan interest rates and loan terms can be incredibly generous for borrowers with excellent credit or a qualified co-signer. If you want to pay as little interest as possible on your student loans, private student loans may be the best option.

Cons

  • Shorter repayment timelines. Private student loans tend to come with shorter repayment timelines than federal loans. Through some government programs, you can adjust your student loan repayment to 25 or 30 years, while most private student loans have caps of 15 years for undergraduates.
  • No government-sponsored public service or teacher loan forgiveness. Programs like Public Service Loan Forgiveness (PSLF) are not available for private loans. In general, there are few forgiveness options for private loans.
  • No income-driven payment plans. Some federal student loans can be repaid on income-driven repayment plans, which adjust your monthly payment based on your income. Private student loans typically only have traditional repayment options.
  • No government deferment or forbearance. While some private student loans have hardship options if you’re having trouble making payments, these programs are not nearly as robust as what federal loans offer.

Federal vs. private student loans

Federal loans Private loans
Type of interest rates Fixed rates only Variable or fixed interest rates
Loan amounts Up to $57,600 aggregate for undergraduates, up to the full cost of attendance for graduates Up to the full cost of attendance with most lenders
Grace period 6 months Can be as long as 12 months
Co-signer required? No Often required
Repayment terms Standard term is 10 years; income-driven repayment plans available to extend repayment 5 to 20 years
Loan forgiveness programs Available for all borrowers None
Need good credit to qualify? No Yes
Best for Most borrowers Borrowers who have reached their federal loan limit

Should you take out a private student loan?

Most experts suggest maximizing federal student loans before turning to private student loans. That way, you’ll have access to income-driven repayment plans, loan forgiveness programs and extended deferment and forbearance periods.

If you still need money to cover tuition or other expenses, consider private student loans. And only borrow what you need; the more you borrow now, the more you’ll have to pay back after you graduate.

Other scenarios where private loans make sense include:

  • Your expenses suddenly change. If you’ve already maxed out federal student loans and your college expenses suddenly go up, private student loans can help you access more funding quickly.
  • You don’t qualify for federal loans. International students may not qualify for federal loans, so private loans could be the only source of funding.
  • You have a specific plan to repay the money you borrow in a short amount of time. If you have a plan to repay your student loans over a few years, private student loans could end up being cheaper overall.

How to choose the best private student loan

It’s important to shop around before you decide on a lender. In other words, take the time to compare loan options from multiple lenders; don’t just go with the first private student loan company you find. Here’s how to find the best one:

  • Decide between a fixed and variable rate. Many private lenders offer the choice between a fixed and a variable rate, but some offer only one or the other. Consider your priorities ahead of time so you know what to look for.
  • Compare interest rates. Interest rates determine how much your student loan will cost in total. Compare interest rate ranges from various private lenders to find the lowest one. Take advantage of prequalification offers so you can see what rate you qualify for without incurring a hard check on your credit report.
  • Apply for the right loan for your degree. Some student loans are created for students in specific programs. For example, you will need to explore specific private loan programs if you’re pursuing an MBA or planning to attend medical or dental school.
  • Research each lender’s reputation. A lender’s reputation is just as important as its interest rate when it comes to applying for a private student loan. There are lots of reputable third parties you can use when looking into a lender’s reviews, like the Better Business Bureau (BBB).
  • Browse benefits. Some lenders offer specific benefits, like no late fees or long grace periods. Some might offer programs that make payments more manageable after graduation.
  • Ensure that the lender accepts your school. While a lender might sound good on paper, some may have a specific list of approved schools. To find out if your school qualifies, you can check the lender’s website or call to inquire.

Is there any way to get private student loans forgiven?

Private student loans don’t offer forgiveness programs the way that federal loans do. Private loans are also exempt from the student loan cancellation proposals that Biden talked about during his campaign. The only way private student loans can be forgiven is if the borrower dies or becomes permanently disabled.

Many private student loan lenders offer hardship assistance programs, but qualifications vary based on your lender and circumstances. There’s no standard across all private student loan lenders, so you’ll need to contact each one to see if you’re eligible.

Written by
Holly D. Johnson
Author, Award-Winning Writer
Holly Johnson writes expert content on personal finance, credit cards, loyalty and insurance topics. In addition to writing for Bankrate and CreditCards.com, Johnson does ongoing work for clients that include CNN, Forbes Advisor, LendingTree, Time Magazine and more.
Edited by
Student loans editor
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