Guide to Private Student Loans

Let’s face it — college is not exactly cheap. For some people, the price tag alone is the biggest obstacle when it comes to obtaining that highly desired degree.

So, as a young adult with few skills and likely little money, you may turn to borrowing student loans to help bridge the gap left by scholarships, grants, and college savings. 

But did you know that not all student loans are issued by the federal government? The other type of student loans you can borrow are private student loans, and this is your guide to understanding the ins and outs of them.

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How Do Private Student Loans Work?

Like federal student loans, private student loans are used to pay for the costs of college and other school-related expenses. 

Private student loans are issued by a bank, credit union, or lender. To be approved, you will have to meet certain credit and income requirements, depending on the lender. 

If you struggle to meet the credit or income requirements on your own, you may also seek a co-signer to take joint responsibility for the loan.

You will be given a term to repay the loan and an interest rate, which can be either variable (changes) or fixed (will not change.) These two pieces together will determine your total monthly payment.

Once you are approved and you’ve signed the dotted lines, the funds will typically be disbursed directly to your school. Your school may refund any funds that exceed the cost of your education expenses back to you.

Private student loans may sound like the solution to your education dilemma — but they are usually a last resort. Typically, they are sought after you have already borrowed the maximum amount possible of federal student loans. 

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Private Student Loans vs. Federal Student Loans

The most common type of student loans are federal student loans. 

As of March 2024, federal student loans account for nearly 93% of all student loan debt, according to Education Data Initiatives. Private student loans account for the other 7% of student loan debt.

There are differences between the two — a key difference being who issues the loans. 

Federal student loans are issued by the federal government through the U.S. Department of Education, while private loans are issued by a “private” or independent lender. 

But, the total amount of federal student loans you can borrow is capped. Currently, the aggregate loan limits for federal student loans are:

• $31,300 for dependent undergraduate students. Dependent students meet criteria defined by the Department of Education and have to report their parents’ income.
• $57,500 for independent undergraduate students. Independent students report their own income and do not report their parents' income.
• $138,500 for graduate students. This loan limit also includes all the loans you received for undergraduate studies.

In addition to aggregate limits, there are also annual borrowing limits. Reaching either limit on federal student loans may cause you to turn to private student loans to pay for your education. 

Who Is Eligible for Private Student Loans?

If you are a student pursuing a degree, you are more than likely eligible for private student loans. 

Specific eligibility requirements will depend on the lender. Typically, the basic requirements are your school status, credit score, annual income, age, and citizenship status. 

School status and expense type 

To borrow a student loan, you’re required to be a student actively pursuing a degree at an accredited college or university. 

The majority of lenders will also require you to be at least at half-time status. But, there are lenders out there who will lend to part-time or career-training students.

This may seem like a no-brainer, but lenders also require the expenses to be directly related to the cost of your education. These expenses include tuition and fees, housing expenses, meal plans, textbooks, supplies, and transportation. 

Credit score and income 

Private lenders will require you to prove creditworthiness — meaning they are looking for your ability to repay the loan. They will obtain a credit report and also require you to report your income. 

It’s hard to know the exact credit score you will need to have as lenders aren’t upfront about this. In general, a credit score in the mid-600s is the minimum to qualify. 

Income requirements will also vary. Lenders usually look at your debt-to-income ratio (DTI), meaning how much debt you have in comparison to your monthly income. 

You can make as little as $25,000 a year and qualify, but other lenders may require you to have more income, especially if you have a higher DTI.

If either your credit score or income is sub-standard, you can enlist the help of a co-signer. A co-signer is another person who is on the hook for repaying the loan if you can't. 

The co-signer will have to provide their income and be subject to a credit pull as well. 

Age and citizenship status

You will need to be 18 years old (19 in some states) to legally sign for a private student loan. 

You also will need to be a U.S. citizen or permanent resident with a Social Security number. If you are an international student, some lenders may allow a U.S. resident to co-sign with you.

How To Apply for Private Student Loans

The application process for private loans is a bit different than applying for a federal loan. 

To apply for private student loans, you will need to go to the lender, bank, or credit union directly. Oftentimes you can do this online and receive a decision pretty quickly.

1. Find the right lender

This may take a bit of independent research — you are a student after all, right?! 

Take the time to identify the best and most reputable lenders. During this process, you’ll want to compare interest rates, evaluate the terms and conditions, and read reviews.

2. Gather documents

Once you’ve nailed down your lender, you’ll gather all your necessary documents such as your Social Security number and identification like your driver’s license or passport. 

You’ll also likely need proof of your income (like paystubs or tax returns). 

Make sure to have your school’s information ready and any financial aid award letters, too. 

3. Pre-qualify

Many lenders allow you to “pre-qualify” before making an official application. This may require some initial questions about your finances but doesn’t involve a hard credit check yet.

If possible, try to pre-qualify to see your approval likelihood (or your interest rate) before initiating a hard credit check. 

Hard pulls will impact your credit while soft pulls will not!

4. Fill out the application

Once all of the above steps are completed, it’s now time to fill out the application. 

Most applications will be online and will be pretty straightforward. You’ll enter your personal information, including your income info, and your school’s info. 

Typically, you also can decide to add a co-signer in this step, though lenders may also put that on the table for you in case you are rejected.

Be prepared to also upload your income documentation or your ID to the application. 

Once everything is complete, hit submit and cross your fingers!

READ MORE: How to Apply for a Student Loan (Federal or Private)

How To Repay Private Student Loans

Firstly, make sure to become familiar with the repayment terms. Some private student loans will require immediate repayment while you are still in school. Others may give you a grace period, similar to repayment on federal student loans.

You will repay your private student loans directly through the lender or bank. You will likely have a few options for making your payments — typically either by writing a check or authorizing an ACH (electronic) payment. 

I say your best bet will be to make your payments online, via ACH. This is much easier than relying on the mail to deliver your payment and will allow for faster processing, too.

A little tip: Ask your lender if they offer an interest rate discount for setting up autopay. This is when lenders pull the funds directly from your account monthly on the due date.

Sometimes lenders will reduce your interest rate by up to 0.50% if you select this option, which can save you money over the term of your loan!

Finally, if you have to make payments immediately, work your new payment into your budget. If you are late on your payments, it can affect your credit, so it’s very important to pay timely. Autopay can help you with this, too.

READ MORE: How To Start Paying Your Student Loans Back

Pros and Cons of Private Student Loans

Like most things in life, there are both upsides and downsides to private student loans. 

Pros of private student loans 

• You can control the lender or who you borrow from. With federal student loans, you generally have no control and are automatically assigned a “servicer.” These can even change from time to time. But with private loans, you can choose your lender.
• Private loans may be cheaper than federal student loans. If you have good credit and a higher income, you may qualify for a lower interest rate than with a federal loan.
• You can borrow more. The limits of how much you can borrow are typically your cost of attendance and aren’t capped like federal loans. 
• The application process is faster and more straightforward. You don’t have to complete the FAFSA (Free Application for Federal Student Aid) and wait the waiting period for private loans. 

Cons of private student loans 

• The loans may require immediate repayment while you are in school. Federal loans will grant you automatic “in-school” status. Private loans may not. Immediate repayment may be tricky if you have limited income while in school. 
• Private loans may be more expensive. The interest rates on private loans can be either variable or fixed but can be higher than the rates on federal student loans.
• Private loans require an existing credit profile. And if you don’t have good credit, you may need to find a co-signer.
• Private student loans are not eligible for government forgiveness or forbearance. During the COVID-19 pandemic, payments were paused (and also did not accrue interest). Some federal loan borrowers may also qualify for forgiveness under certain programs. You will not be eligible for programs like this with private student loans.

FAQs

Can private student loans be forgiven?

Private student loans are typically not eligible for the same types of forgiveness programs that apply to federal student loans — like the PSLF (Public Service Loan Forgiveness) or income-driven repayment plans.

Are there private student loans for bad credit?

Some lenders will offer student loans if you have bad credit, although they’ll likely charge high interest rates and you might need a co-signer. If you have bad credit, it’s best to max out your options for federal student loans first.

Should You Get a Private Student Loan?

I’ll be transparent: Private student loans may not be the best option for everyone. It's typically best to borrow federal student loans before private student loans.

If you have excellent credit and a higher income, you may find private loans that offer lower rates. And if you are capped on the amount you can borrow in federal student loans, private loans can help cover the difference. You also can select your lender, which for meticulous borrowers could be a perk. 

But, you may want to skip private student loans if you are within your borrowing limits for federal student loans. Also consider skipping private loans if you do not have an established credit history, and can’t make immediate payments on them. 

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