Pros and cons of private student loans

The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for .
Private student loans are educational loans offered by private lenders like banks, credit unions and online lenders. Unlike federal student loans, private loans typically don’t come with benefits like income-driven repayment plans and loan forgiveness options — which is why it’s best to apply for federal student loans first.
But if you’ve exhausted your allotment of federal loans, private loans can come in handy, and in some cases, you could even get a lower interest rate.
Should you get a private student loan?
Private student loans are a way to finance your education through a private lender. These lenders operate outside of the Department of Education, which offers federal student loans. Students take out private student loans to help pay for tuition, fees, room and board, transportation and more. While private student loans charge interest — adding to the overall cost of an education — they’re often necessary after borrowers have exhausted scholarship, grant, work-study and federal student loan opportunities.
In most cases, college students should turn to federal student loans first if they need help financing their education after free money options have been exhausted. This is primarily because federal loans give you access to income-driven repayment plans and loan forgiveness programs, but also because there’s no credit check for most loans, and everyone who qualifies gets the same interest rate. With that said, most federal loans limit how much you can borrow each year and in total, and borrowers with excellent credit could find lower interest rates with private loans.
A private loan is best for:
- Borrowers who have exhausted their federal student loan options and still need money to cover funding gaps in their education.
- Those who have excellent credit or who have access to a reliable co-signer with excellent credit.
- Students who don’t plan to take advantage of forgiveness options, income-driven repayment plans or other federal benefits.
- International students who cannot qualify for federal financial aid.
Private student loans vs. federal student loans
Private student loans | Federal student loans | |
Standardized interest rates | No | Yes |
Fixed and variable rates | Yes | No |
Upfront loan fee | Generally no | Yes |
Requires a credit check | Yes | Generally no |
Requires a co-signer | Generally yes | Generally no |
Access to loan forgiveness programs | No | Yes |
Access to income-driven repayment plans | Generally no | Yes |
Loan limits | Typically up to your total cost of attendance | Varies by loan program |
Pros of private student loans
In the right situation, private student loans can have some clear benefits. Here are some to keep in mind.
Can be cheaper than federal loans
If you’re an undergraduate student, you likely won’t find anything cheaper than a federal student loan, especially if you haven’t had the chance to build a credit history. But graduate and parent loans through the Department of Education are pricier than undergraduate loans, both with interest rates and the upfront loan fee.
If you have a solid income and a high credit score, you could potentially score a lower interest rate than the federal government charges. Also, private student lenders typically don’t charge an upfront fee.
Depending on the situation, it’s good to compare what you might qualify for with private lenders and what the federal government offers.
Higher borrowing limits
If you’re attending an expensive school, you may not get the amount you need if you only go through the federal government for student loans.
If you’re an undergraduate student, for instance, you can borrow between $5,500 and $12,500 per year, depending on your year in school and dependent status. The lifetime maximum is $31,000 for dependent students and $57,500 for independent students.
With private loans, however, you can typically borrow up to the total cost of attendance every year, giving you more flexibility to get the financing you need.
Open to those who don’t qualify for federal student loans
Borrowers not eligible for federal student loans may find they qualify to borrow private student loans. The requirements for private borrowing are different and will likely take your finances into account, but this may be an especially helpful option if you do not qualify for other types of financial aid.
Potentially tax deductible
Up to $2,500 in private student loan interest each year may be deductible on your tax return. Lenders will issue a form 1098-E indicating how much interest you’ve paid over the previous year. Consult the IRS website or a tax professional for details.
Cons of private student loans
Although private loans can be beneficial in certain situations, some major drawbacks make them less appealing for most students.
No access to income-driven repayment or forgiveness
Federal loans offer income-driven repayment plans that reduce payments based on borrowers’ income, a great option for borrowers struggling to meet high monthly payments. Most private lenders don’t extend that same generosity; the only way to lower monthly payments is to go through the refinancing process.
Also, if you work as a teacher or in some other form of public service, you may qualify to have some or all of your federal loans forgiven after you meet certain criteria. Private lenders don’t have that option, nor would they be included in any executive action canceling student debt.
Interest rates are based on creditworthiness
In some cases, you can qualify for lower interest rates with private lenders than what the federal government offers. But private lenders offer a range of rates, and unless your income and credit score are stellar, you may end up with a much higher rate than you want.
Of course, many private lenders allow you to apply with a co-signer, such as a parent, which can improve your chances of getting favorable terms. But even that’s no guarantee.
It’s also important to note that the lowest private student loan interest rates are generally variable, fluctuating over time with market conditions. If you get a variable-rate loan, your monthly payment could increase.
There’s no federal subsidy
Undergraduate students with financial needs may qualify for subsidized federal student loans. With these loans, the federal government pays your interest while you’re in school, as well as during future deferment periods.
With private loans, though, there is no subsidy, so you’re on the hook for all the interest that accrues on your debt.
Usually cannot be discharged in bankruptcy
Private student loans generally cannot be discharged when a borrower files for bankruptcy. Due to an overhaul of the bankruptcy code in 1978, borrowers must now prove that their student loan payments cause “undue hardship” and prevent them from a minimum standard of living before the courts consider discharging this type of loan.
Deferment and forbearance are more limited
Though these options are standard for most federal student loans, deferment and forbearance options are not guaranteed with private student loans. The availability of these payment pauses may depend on your lender’s unique terms.
How to apply for a private student loan
If you need a private student loan to cover your college costs, here’s how to apply for one.
- Compare lenders. Private student loans require strong credit history from borrowers. Review each lender’s eligibility requirements to see what you’ll qualify for. Compare them based on interest rates, fees, repayment plans and relief options, if any.
- Get prequalified. Once you have a handful of lenders in mind, complete prequalification forms to see which ones you’d get approved for. Prequalification is a soft credit check — not a hard one — so completing these won’t ding your credit score and cause it to drop. Receiving quotes from several lenders gives you a better idea of which is best for you.
- Complete an application. Once you have the right lender in mind, complete a full application. Prepare important documents, like personal and employment information, income verification, school details and tax forms. If you’re applying with a co-signer, they’ll need these documents as well.
- Wait for approval. Your lender might request additional information from you or your school, so approval might not be instantaneous. Stay on alert, and if your lender needs additional forms or documents, send them in as soon as possible. Once approved, find out when repayment starts. For some lenders, that might be while you’re still in school. Others might offer deferment while students are still enrolled at least half time.
Bottom line
Ultimately, private student loans are a valuable option for borrowers who may not be able to source the full funding needed for an education otherwise. Borrowers should be aware of the potential benefits and drawbacks of private student loans before applying for them and thoroughly research different lenders to find the loan that best suits their finances and course of study.