Private student loans are school loans offered by private lenders instead of the federal government. Private lenders include banks, credit unions, state agencies, universities or other lending institutions. These types of loans can be useful if you need more funding than federal student loans can provide.

These loans use your credit score, annual income and more to deliver customized interest rates and terms, much like a personal loan or credit card. In addition, with private student loans, you often have the choice between variable and fixed interest rates and may be able to choose among a variety of payment terms—some as long as 20 years.

Types of private student loans

There are a handful of different types of private student loans from which you can choose. Understanding student loans can help you get a better idea of which option is best for you.

Degree-specific loans

On a basic level, private lenders may offer undergraduate and graduate student loans. However, some may also go beyond that with degree-specific loans for medical, business, dental and law programs. You may even be able to get a loan to study for the bar exam or for your time at a community college.

Degree-specific loans may have perks uniquely tailored to the needs of that program — for instance, a medical school loan may have longer grace periods or automatic deferment while you complete a residency.

Lenders that offer degree-specific loans include College Ave, SoFi, Earnest, Sallie Mae, Citizens Bank, PNC, and Ascent. Lenders may offer private loans for certain degree fields but not others, so it is best to check with each company based on your course of study.

International student loans

International students may have a hard time getting approved for credit when they need it. They are also generally not eligible for federal student loans, which leaves private loans as their only option. Some lenders specialize in offering student loans to international students who may not meet the standard requirements for traditional private loans, though international students may need to have a co-signer who is a U.S. citizen to be approved.

Companies that lend international student loans include Ascent, Citizens Bank, College Ave, and Sallie Mae. Eligibility may vary based on individual lender requirements.

Bad-credit loans

If you need student loans and your credit history is poor or nonexistent, your best bet is federal student loans because they typically don’t require a credit check.

However, if you need private student loans for bad credit, some lenders have less stringent credit requirements for college students who haven’t had the chance to build credit or students who need the funding but don’t have a stellar credit history. Remember that these loans typically charge higher interest rates than standard private loans.

If possible, look for a lender that allows co-signers, which may help you secure a lower rate.

State-specific loan programs

Many states offer private student loans through a specific state agency. Examples include the Rhode Island Student Loan Authority, the Iowa Student Loan Education Lending and the Bank of North Dakota.

These private student loans are typically reserved for students who are attending a college within the state’s borders but possibly also for residents who are studying in another state. Eligibility requirements vary from state to state.

Income share agreements

Income share agreements function differently than traditional student loans. Instead of making a fixed monthly payment based on your student loan balance and an interest rate, you’ll pay a percentage of your income over a fixed number of years.

Before you apply for an income share agreement, figure out what the income percentage and repayment term will be. These agreements typically also have a salary floor and a payment cap to ensure that both parties are treated fairly.

Parent loans

You may apply for a private student loan to help pay for your child’s education as the primary borrower or a co-signer. When you apply for the loan on your own, you’ll be responsible for paying it back. By comparison, co-signing for the loan means you’ll share responsibility for repaying the loan with your child.

Refinanced student loans

Several private financial institutions offer refinance student loans, which are private student loans that are used to consolidate your existing student loans. Refinancing your student debt might make sense if you can qualify for a lower rate, as doing so could save you thousands of dollars in interest.

In addition, refinancing to a loan with a longer term can make your monthly loan payments more affordable. But note that doing this may result in paying more interest over the life of the new loan.

Private student loans vs. federal student loans

Private student loans and federal student loans are designed for the same purpose: to help cover higher education costs. However, while private loans originate from banks, federal student loans come from the U.S. Department of Education. Here are some other key differences between the two types of loans to be aware of.

  • Loan amounts: Federal loans generally max out at $5,500 to $12,500 per year for undergraduate borrowers, but private loans often cover up to the full cost of attendance.
  • Interest rates: Federal student loans give all borrowers the same interest rates, but private loans rely on your credit score to set rates. That said, you could get a lower interest rate with a private loan if you have excellent credit. But federal student loans are generally more accessible to younger borrowers without a long credit history or co-signer.
  • Benefits: Depending on your financial need, you can qualify for subsidized federal loans, which don’t accrue interest while you’re in school. Federal loans also have many options for deferring your payments and offer income-driven repayment plans, which can make them more affordable for people who have low incomes. However, private loans don’t offer these perks.

How to determine which private student loan is best for you

The best private student loan for you depends on your priorities — whether that’s the lowest interest rate possible, flexible repayment terms or unique perks that will help you with repayment. When considering private student loans, compare all of the loan features, including repayment terms, fees and interest rates, to get a sense of what your repayment will look like after graduation. You can use a student loan calculator to estimate the cost of the loans you’re offered.

Once you have decided how much funding to apply for and which lenders align with your priorities, you can decide where to apply. You may consider multiple applications to compare the rates and terms you qualify for with different companies.

Such applications typically require a hard credit check, so limiting your applications to a short time window can help minimize the impact on your credit score. If you’re comparing income share agreements with more traditional private loans, you can also use an online calculator to get an idea of what you’ll end up paying and how that compares to what you’d pay in interest on a different type of loan.

How to apply for a private student loan

To get a private student loan, you’ll apply directly with the lender of your choice to find out what terms you qualify for — either online, over the phone or in person. Some loan aggregators like Bankrate will run your information through several lenders simultaneously.

  • Step 1: Get prequalified. Most private lenders allow you to get prequalified with just a soft credit check before you submit a full application. This process can give you an initial quote based on the information the lender can see, and it doesn’t impact your credit score.
  • Step 2: Compare loan offers. Review the loan offers you receive to narrow down your options. Comparing private loan interest rates from multiple lenders also makes it easier to choose the best fit for you.
  • Step 3. Apply for a loan. Once you’ve decided which loan offer is most ideal for your finances, formally apply for funding. The lender will provide you with either an approval or a denial.
  • Step 4. Review the loan offer. If you’re approved, the lender will share the terms of the loan with you. Be sure to review the loan agreement in its entirety and ask the lender any questions you may have before moving forward.
  • Step 5: Receive the loan proceeds. If you accept the offer, you’ll sign the paperwork, and the lender will disburse the loan funds to your school.

If you’re denied a private student loan, you may be able to apply again with a creditworthy co-signer, who can improve your odds of getting approved. Even if you can qualify on your own, a co-signer could help you score a lower interest rate.

The bottom line

Federal student loans, with benefits like income-driven repayment and forbearance, should often be your first option when funding college expenses. Most experts — and even private student loan companies themselves — recommend using as much of your federal loan allotment as possible before turning to private loans. But private student loans can help provide additional funds if you’ve exhausted federal student loan borrowing options.

There are many types of private student loans, including degree-specific loans, international student loans, and bad credit loans. Identifying the best type of loan for your needs is a personal decision, but it’s important to search for the best loan terms and interest rate based on your financial picture.