Types of private student loans: Which should you choose?

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Private student loans are school loans offered by private lenders instead of the federal government. When you’re shopping around for a loan, however, you may notice that there are different types of student loans from these private lenders, including degree-specific loans, bad-credit loans and international student loans.

Here’s what you should know about the types of private student loans and which one is best for you.

What is a private student loan?

A private student loan is a student loan offered by a private lender, such as a bank, credit union, state agency, university or other lending institution.

Private student loans are generally best considered if you’ve exhausted your allotment of federal student loans or if you can qualify for better terms through a private lender than what the Department of Education has to offer. Even then, though, many experts recommend using federal loans first.

Unlike federal loans, private student loans require a credit check when you apply. They also offer a range of interest rates, often both variable and fixed, and the one you qualify for will be based on your creditworthiness.

Private student loans typically don’t offer access to income-driven repayment plans or student loan forgiveness. That said, private lenders typically don’t charge upfront loan fees like the Department of Education does. Also, you can often borrow as much as you need, so they can be a good option if you can no longer borrow federal student loans.

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 a list of other 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.

International student loans

International students may have a hard time getting approved for credit when they need it. If you’re a permanent resident or you have a certain visa, that may be all you need in order to get a student loan. But if not, some lenders specialize in offering student loans to international students who may not meet the standard requirements for traditional private loans.

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 loans, there are lenders that have less stringent credit requirements for college students who haven’t had the chance to build credit or students or parents who need the funding but don’t have a stellar credit history. Just keep in mind that these loans typically charge higher interest rates than standard private loans.

State-specific loan programs

Many states offer private student loans through a specific state agency. A few 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. Eligible 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.

Which private student loan is best for me?

When considering private student loans, take your time to evaluate what your needs are to determine which one is best for you. Compare all of the loan features, including repayment terms, costs and interest rates, to save as much money as possible.

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 do I apply for a private student loan?

With federal student loans, you apply by filling out the Free Application for Federal Student Aid (FAFSA). But with private lenders, you’ll apply directly with the lender of your choice to find out what terms you qualify for.

Most private lenders even allow you to get prequalified with just a soft credit check. This process doesn’t impact your credit score, but it can give you an initial quote based on the information the lender can see. Comparing private loan interest rates from multiple lenders can make it easier to choose the best fit for you.

Once you’ve submitted your application, the lender will provide you with either an approval or a denial. If you’ve been approved, the lender will share the terms of the loan with you. If you accept the offer, you’ll sign the paperwork, and the lender will disburse the loan funds to your school.

If you’ve been denied, 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.

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Written by
Ben Luthi
Contributing writer
Ben Luthi is a personal finance and travel writer who loves helping people learn how to live life more fully. His work has appeared in several publications, including U.S. News & World Report, USA Today, Yahoo! Finance and more.
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Student loans editor