It’s no secret: college is expensive. Few students can afford to pay tuition and living expenses out of pocket. Instead, they rely on other funds to pay for school, including student loans. When you research student loans, you’ll see that there are two different types: federal and private. So what is a private student loan, exactly?
In this article, we’ll be answering all of your questions about private student loans. To learn about the difference between federal loans and private loans, click here: Private vs. Federal Student Loans.
What is a Private Student Loan?
A private student loan lets you borrow money from a bank, credit union, or online lender to pay for college. You have to pay this money back, plus interest.
You can use a private student loan to pay your college tuition. You can also use it for other educational expenses, including room and board, books and supplies, and transportation.
Private student loans are especially useful if you’ve already exhausted other sources of funding, like grants, scholarships, work-study, and federal student loans.
A private loan can cover all of your remaining college expenses after you take advantage of these other sources.
Who Can Use a Private Student Loan?
Both undergraduate and graduate students can apply for private student loans. However, most college students don’t have the credit score required to qualify for a private student loan. If this is the case, you can take out a private student loan with a cosigner.
A cosigner is someone who meets the credit and income requirements (usually a parent). They agree to take responsibility for the loan if you start missing payments.
Many lenders also offer separate parent loans, which don’t require a check on the student’s credit.
Pros and Cons of Private Student Loans
A private student loan has unique benefits and drawbacks that are different from other funding sources.
If you want the answer to, “What is a private student loan?” it’s crucial to understand both sides of the coin. Below, we’ll outline the pros and cons of private student loans.
- You can borrow as much as you need. The most significant benefit of a private student loan is that it will typically allow you to borrow up to your remaining Cost of Attendance (COA).
- If you’ve already received grants and federal student loans, but you have additional expenses, you can usually cover the full remaining cost with one private loan.
- Private student loans are flexible. Similarly, you can apply for a private student loan at any point, without worrying about federal aid deadlines.
- Federal student aid is limited based on annual government limits, but private loans don’t face the same issue.
- You can get a lower interest rate (sometimes). A private student loan can have an interest rate as low as 2.93%, which is well below the set rate for federal loans. However, you or your cosigner have to be highly-qualified to get a rate that low.
- It can be hard to choose a lender. There are many options when it comes to private student loans, which can make the process a little bit more difficult. Shopping for a private student loan requires some research.
- They’re not federal loans. The main downside of private student loans is that they lack all of the benefits of federal student loans, like income-driven repayment plans and Public Service Loan Forgiveness.
Our List of Top Private Student Loan Lenders
How to Apply for a Private Student Loan
Applying for a private student loan is possibly the easiest part of the process. You can usually complete the whole process online in just a few minutes.
To apply for a private student loan, you’ll need to enter information about your credit, assets, and income. If you’re applying with a cosigner, they’ll need to enter the same information.
After you complete the application online, you’ll typically get a decision of approval or denial within just a few minutes. Otherwise, you may receive a letter in the mail, or you might be asked for additional information.
How Does a Private Student Loan Work?
Once you have the answer to, “What is a private student loan?” you might also ask, “How does a private student loan work?” You can say what a private student loan is in theory, but what does it look like in practice?
After you apply for a private student loan and you’re approved, here’s what will happen next:
The private lender will contact your college directly to verify loan amounts.
The college and lender will make arrangements for disbursal.
The lender will send the full loan amount to your school.
Your college will apply the loan to your tuition and any other fees.
The college will give you the leftover funds to pay for other educational expenses like books and housing.
Do You Need Private Student Loans for College?
Many students find that they need private loans to cover their college expenses. However, you don’t necessarily have to take out a private loan for school. If you can pay tuition, room and board, books and expenses, and all of your other educational expenses without a private loan, you should do so.
With private student loans (and loans in general), you should never borrow more than you need. You’ll pay for each dollar you borrow, in the form of interest, so your best choice is to borrow as little as possible.
Before you apply for private student loans, make sure you’ve filled out your FAFSA and accepted any Direct Subsidized Loans, and Direct Unsubsidized Loans that will help you pay for school. Pell Grants are accepted automatically and disbursed to your school’s financial aid department.
How to Choose a Private Student Loan Lender
As mentioned above, one of the downsides of private student loans is the time it can take to choose a lender. However, there are two key points to look at when you’re comparing lenders: rates and terms, and repayment options.
Private Loan Interest Rate and Repayment Term
When you’re shopping for a private student loan, interest rate and repayment term are key points to consider.
Interest rate is the percentage you’ll repay in addition to the principal (the amount you borrowed). Interest accrues annually, and private student loan interest rates range from about 3% to 13%. The lower an interest rate you can get, the better.
Repayment term is the amount of time you take to repay your loan principal plus interest. Because interest accrues annually, a longer term means you’ll pay more overall. However, a shorter term means you’ll pay more each month.
Private Student Loan Repayment Options
Private student loans don’t qualify for options like income-driven repayment and Public Service Loan Forgiveness. But private lenders do offer their own repayment options that can help you pay less each month or pay off your loan more quickly.
Before you accept a private student loan, make sure to check out the lender’s repayment options. Most lenders offer four options: immediate repayment, interest-only repayment, partial-interest repayment, and full deferment. We’ll go over these options in more detail below.
How Do You Repay Private Student Loans?
Most lenders don’t require students to make payments while they’re in school. However, some lenders do ask for in-school payments. It’s essential to read through your loan documents and make sure your lender’s repayment schedule suits your situation.
Private student loans that don’t require in-school payments typically have a grace period of about six months, but the length of your grace period can vary. Once you graduate, you’ll be required to start making payments after that length of time is up.
As mentioned above, most private student loan lenders offer four types of loan repayment. When you choose your lender, you’ll also choose which type of loan repayment option you want to use. If you want to change your repayment option at any point, you’ll have to contact your lender.
Here are the four types of private loan repayment that are offered by most private lenders, in one shape or another:
You start making full monthly payments immediately, while you’re still in school.
You start making monthly payments while you’re still in school, but you only pay interest, not any of the principal.
You start making monthly payments while you’re still in school, but the amount you pay is set at a fixed amount (usually around $25).
You don’t pay anything while you’re in school, but your balance grows as interest accrues.
Managing Your Private Student Loans
If you’re considering taking out a private student loan to pay for college, it helps to look towards the future. How will you manage your private loan while you’re in school and after you graduate from college?
Below are some of the options to consider as you create a private loan strategy.
Paying While You’re Still in School
You might not have to start paying your private student loan back while you’re still in school, but that doesn’t mean you shouldn’t. If you’re working while you’re in college, you can get a jump-start on repaying your loan, so that you end up paying far less interest over time.
You’ll have to check with your private student loan lender, however—some lenders have prepayment penalties, which can limit how much you can pay off before a given date.
Private Loan Deferment
If you’re out of college and past the grace period, what happens if you can’t make payments on your private loan?
Loan deferment is commonly offered for federal student loans, but some private lenders offer deferment options, too. With deferment, you can put your payments on pause for a period of time—usually several months.
The catch is that interest will continue to accrue on your loans while they’re in deferment, meaning you’ll pay more in the long-run.
Once you graduate from college and find gainful employment, you’ll qualify for better loan terms than you did as a college student.
One of your options for managing your private student loan is refinancing, which can help you get better interest rates and terms, and ultimately save money.
To learn more about loan refinancing, click here:
What is a Private Student Loan? Final Word
A private student loan isn’t always necessary to pay for college, but it’s often useful. Federal loans are limited by the Department of Education each year, so they don’t always cover the full cost of education.
If you’ve accepted federal loans and Pell Grants, and you’ve applied for other sources of funding like scholarships, a private loan can help make up the difference.
When you choose a private student loan lender, make sure to follow the tips above and get the loan available.
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply. (1)The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation. (2)$5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. (3)This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary. Information advertised valid as of 1/27/2021. Variable interest rates may increase after consummation.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.
Ascent: Ascent’s undergraduate and graduate student are funded by Bank of Lake Mills or DR Bank, each Member FDIC. Loan products may not be available in certain jurisdictions. Certain restrictions, limitations; and terms and conditions may apply. For Ascent Terms and Conditions please visit: www.AscentFunding.com/Ts&Cs. Rates are effective as of 11/1/2023 and reflect an automatic payment discount of either 0.25% (for credit-based loans) OR 1.00% (for undergraduate outcomes-based loans). Automatic Payment Discount is available if the borrower is enrolled in automatic payments from their personal checking account and the amount is successfully withdrawn from the authorized bank account each month. For Ascent rates and repayment examples please visit: AscentFunding.com/Rates. 1% Cash Back Graduation Reward subject to terms and conditions. Cosigned Credit-Based Loan student must meet certain minimum credit criteria. The minimum score required is subject to change and may depend on the credit score of your cosigner. Lowest APRs require interest-only payments, the shortest loan term, and a cosigner, and are only available to our most creditworthy applicants and cosigners with the highest average credit scores.
*The minimum amount is $2,001 except for the state of Massachusetts. Minimum loan amount for borrowers with a Massachusetts permanent address is $6,001.