What Is a Private Student Loan?

Pursuing a college degree is a significant investment, and for most prospective students, figuring out how to best finance their education can be a daunting task. For some, a combination of savings, parental support, and scholarships may be enough to get you through until graduation, but for the vast majority of individuals, student loans are a necessity. Intended to assist you with covering your tuition, books, supplies, and even living expenses, the right loan can relieve the financial pressure you face during your academic journey, and there are both federal and private options for you to explore. Which one is right for you will depend on a number of different factors, but understanding the key differences between the two is important if you want to be certain that you’re selecting the correct option for your needs. 

Federal Student Loans 

For federal student loans, these are offered through the U.S. government, and they can be an attractive solution thanks to their fixed interest rates, more lenient requirements, and potential deferment programs that may be available post-graduation. In general, federal loans are the first avenue that students should explore when trying to figure out how to pay for their education, as they can often have lower interest rates than their private counterparts. However, federal loans may not always be sufficient enough to cover 100% of all school-related costs, and when a gap in funding occurs, that’s when a private student loan can be a valuable asset. 

• Provided by the federal government
• Have a fixed interest rate
• Offers government-backed protections & programs
• May have origination fees

Private Student Loans 

Designed to bridge common funding gaps that many students face, private student loans are provided by banks, credit unions, or other digital lenders who offer varying terms and conditions based on the borrower’s creditworthiness and financial profile. Depending on which lender you go with, your private loan may cover up to 100% of all certified school related costs, which include not just tuition and supplies, but also room and board, as well as transportation. Unlike federal loans, private loans generally have both fixed and variable interest rates to choose from, but they also require you to undergo a hard credit check during the application process in order to determine which rate you personally qualify for.

• Offered through banks, credit unions, or other private lenders
• Have both fixed and variable interest rates available
• May not qualify for forgiveness or deferment programs
• Do not typically feature an origination fee

Who Are Private Student Loans Best For?

Private student loans are most commonly used in conjunction with federal loans, as well as scholarships, and they can be a worthwhile solution for most students who find themselves with a gap in funding that they need to cover. Primarily, those attending high-cost institutions, graduate students, students with strong credit, and those who have exhausted other avenues will find private loans to be the most beneficial, although they are open to anyone who would like to apply. With that said, there are different types of private loans that may be available to you, depending on the degree you're pursuing, and while this may vary from lender to lender, options can include:

• Undergraduate Loans - Intended to assist students who are pursuing a Bachelor’s degree
• Graduate Loans - Tailored towards individuals in advanced degree programs
• Law School Loans - Helps to cover the costs associated with attending law school
• MBA Loans - Exclusive for those enrolled in a Master of Business Administration (MBA) program

• Health Professions Loans - Designed for students who are pursuing a degree in health sciences
• Parent Loans - Issued directly to parents instead of students, these loans help families cover educational expenses
  

If you’re unsure about whether or not a private student loan is right for you, the best thing you can do is take advantage of the free resources that many lenders provide. From digital calculators to budgeting tools, these resources can help you estimate potential loan amounts, monthly payments, and total repayment costs, and they can even help clarify different terms and explain the loan process. You’re also encouraged to speak to a potential lender directly if you have additional questions or concerns, as they will be able to provide you with more personalized insights that relate to your unique situation.

How Much Do Student Loans Cost?

When it comes to the financial aspect of student loans, there is more to take into consideration than just the principal sum you borrow, and you’ll also need to pay attention to potential fees, as well as your applicable interest rate. For federal loans, an origination fee is standard, and this is set as a percentage of your loan amount, and will be either 1.057% or 4.228% (as of 2024) depending on the type of loan you’re receiving. This amount is then withheld at the time of disbursement, ensuring you don’t have to pay it separately, and it covers the cost of processing the loan, as well as other administrative costs. Thankfully, the vast majority of private lenders do not charge origination fees, and instead, you will simply be responsible for your loan amount, plus the interest that accrues over the life of the loan. 

What your interest rate will be depends heavily on a number of different factors, including your credit score, income, and the lender's policies. However, each lender is upfront and transparent about what their current Annual Percentage Rates (APRs) are, and these can easily be viewed by visiting their website directly to learn more. Almost all lenders will offer both fixed and variable rates for you to choose between, with the core difference being how stable your rate is over time. For fixed rates, your APR will remain the same year after year without any fluctuations, and this can be a smart choice for borrowers who want stability and predictability when it comes to their payments. Variable rates, on the other hand, are based on market conditions, and they can both increase or decrease over time which can impact your payments. When deciding between the two, it’s always best to consider your financial situation, how long you expect to be in school, and your comfort level with risk, and you should always speak with multiple lenders to compare available APRs.

Do I Need a Cosigner?

If you’re applying for a federal student loan, you will not need to have a cosigner for your application, and the only time a parent would need to be involved is if they are exclusively applying for a Parent PLUS loan. Designed to be accessible, regardless of income and credit history, federal loans aim to provide support to students who demonstrate financial need, and you can apply for them directly, even if you’re under the age of 18. 

Private student loans, however, do offer the option to include a cosigner alongside your application, and this can help increase your likelihood of approval, as well as secure you a lower APR in some cases. Since most students have limited income, lower credit scores, or a lack of credit history, having a cosigner - typically a parent or guardian - can enhance your creditworthiness in the eyes of lenders, and you may find you’re not able to be approved without one. 

How to Apply for Student Loans

Thanks to the internet, applying for student loans is easier than ever before, and almost all lenders feature a digital application process that can be fully completed right from the comfort of your own home. Whether you’re simply curious about potential interest rates, or you’re ready to submit an application with a preferred lender, completing the process should be a seamless and streamlined experience, and you can expect to encounter the following steps as you pursue loan opportunities:

• Browse Lenders - With multiple private lenders available to you, it’s important that you take the time to browse all available options, as you don’t want to simply settle on the first one that you find. Online lenders can be a great option if you’re hoping to avoid in-person appointments and conversations, but you can also speak with your local bank or credit union to see what they offer. 

• Review Details - Once you’ve narrowed down your search to a selection of lenders, you’ll then want to familiarize yourself with their borrowing requirements, their current APRs, and any fees that may be associated with their loans. By staying informed, you can prevent any costly surprises post-graduation, and you can avoid wasting time on lenders that you won’t be able to qualify with.

•  Pre-Qualify - If you’ve found a particular lender that appeals to you, they may offer you the opportunity to pre-qualify without impacting your credit score. Utilizing only a soft pull, the pre-qualification process can tell you upfront whether or not this is a potential avenue for you to continue with, and you can also see your tailored rates based on the information you provide. 

• Submit an Application - For individuals who do pre-qualify with a lender, the final step in the process will be submitting a formal application, which does require a hard credit check and can impact your credit score. At this stage, you should only be applying to the single lender you have chosen, and they will work with you to finalize your application, approve funding, and disperse those funds directly to your school when applicable. 

Can You Get a Student Loan with Bad Credit?

Federal student loans are not based on an applicant's credit history, but if you’re applying for a private loan then this is one of the factors that will be taken into consideration during the application process. If you have a credit score that is below the mid-to-high 600s, you may run into difficulty securing a loan on your own, and this is where a co-signer can be a valuable addition to your application. With that said, the only way to know for certain whether or not you qualify is to apply, so you are encouraged to complete the pre-approval process with a potential lender first, as this can give you more tailored answers without impacting your credit score. 

Choosing a Student Loan Provider

When evaluating your options for private student loan providers, you’ll want to pay attention to more than just the rates they offer, or the loan types they have available. Instead, it’s important that you evaluate the entirety of their program to ensure it’s a good fit for your needs, and this includes reviewing their repayment terms, checking for potential fees, and exploring the resources they offer through their website or app. Repayment terms, for example, can vary wildly from lender to lender, and you’ll want to check if you’ll eventually have access to options such as deferment, forbearance, or income-driven repayment plans should a need for them ever arise. As for fees, origination fees, early prepayment penalties, and other applicable charges can all impact how much you end up spending over the course of your loan, and you’ll want to be aware of all financial responsibilities before you finalize your application. 

Thankfully, most lenders are happy to work with you throughout the process to ensure you fully understand all aspects and obligations, and if you have any questions or concerns, it’s always best that you speak with each lender directly. This way you’ll be able to feel confident that you’re receiving the most accurate and up-to-date information available, and you can make a more informed decision when it comes to funding your educational aspirations.