Many college students need student loans to pay for educational expenses. Although federal student loans are typically the most affordable, they may not be a complete solution for every student.
Regardless of your credit, grades or financial need, you may be eligible for federal Direct Unsubsidized Loans. But there are limits on how much you can borrow each year, ranging from $5,500 for dependent undergraduate students to $20,500 for graduate or professional students. There are also total loan limits.
Private student loans can cover the gap between what you need for school and any federal student aid you receive, including grants, loans and work-study pay, as well as how much you can afford to pay toward your school expenses. This guide explains how private student loans work, their advantages and drawbacks, and what you should look for when you’re shopping for private student loans.
Maximizing Federal and Free Financial Aid
Before you consider private student loans, you should make the most of federal aid and free financial aid, including private scholarships.
“Your first step in financing your education is to submit a Free Application for Federal Student Aid, commonly called a FAFSA,” says Jay S. Fleischman, a lawyer who advises student loan borrowers on effective repayment strategies. Even if you don’t think you’ll need financial assistance, or think you won’t qualify, it’s worth filling out and submitting a FAFSA.
The FAFSA is the key to most financial aid. It’s a requirement for the student financial assistance programs authorized under Title IV of the Higher Education Act. These include federal loans, grants and work-study programs. There’s no income cutoff or grade requirement for some types of federal aid, which are common myths.
Though it’s primarily used for federal aid, the FAFSA is often necessary for other forms of financial aid.
“Many states and colleges use your FAFSA information to determine your eligibility for state and school aid,” Fleischman points out. There are private scholarships and grants that require applicants to complete the FAFSA.
How Private Student Loans Work
Federal students loans offer standardized loan types, interest rates and terms to most borrowers. With private student loans, your options and interest rate will vary, though there are some laws that affect all private student loans. Your credit, and that of a co-signer if you have one, will also impact what types of loans you qualify for and the interest rate you’ll receive.
Lenders may offer different types of loans depending on the degree you’re pursuing. The loan type can affect the total possible loan amount, interest rate and repayment terms.
- Community college or technical training: Some lenders offer loans to students who are pursuing a two-year degree, attending a nontraditional school or are going to a career-training program.
- Undergraduate school loans: You can take out undergraduate school loans to pay for expenses while pursuing a bachelor’s degree. Undergraduate loans may have lower interest rates and higher loan limits than community college loans.
- Graduate or professional school loans: Graduate school loans tend to have higher maximum loan amounts than undergraduate loans, reflecting the higher cost of attending school for a master’s degree or doctorate. Some lenders have special loan programs for business, law or medical school.
- Parent loans: Parent loans are offered to parents of students. Some families have an informal agreement that the child will make loan payments after graduating, but with a parent loan, the legal responsibility to repay the loan falls on the parent.
The loan term is the length of the loan’s repayment period, which could range from five to more than 20 years for private student loans. Typically, shorter loans have higher monthly payments, lower interest rates and lower total costs. Longer loans have lower monthly payments, but higher interest rates and higher total costs.
Loan minimums: Most lenders have a minimum amount you can borrow. Although it could be as low as $1,000, a private student loan may not be the best option if you only need a few hundred dollars for books. Loan minimums may vary depending on your state of permanent residence.
Loan maximums: Lenders can have several limits that impact how much you can borrow. There could be a maximum annual or total amount you can borrow from that lender. Or, there could be a maximum aggregate private and student loan amount you must be under to qualify for a loan. The maximum loan limits may be higher if you’re going to graduate, professional or medical school, reflecting these programs’ potentially higher cost.
Regardless of the other limits, you also may be limited to borrowing up to your school’s certified cost of attendance minus the other financial aid you received.
Interest Rate Types
Lenders offer student loans with either a fixed or adjustable interest rate. You may not be able to switch your interest rate type after taking out a loan, so carefully consider your options before deciding.
When you’re comparing student loans from different lenders, you should look at the annual percentage rate rather than the interest rate. The APR is your total cost of borrowing each year, which takes into account the loan’s interest rate, how often your interest compounds, and other fees or discounts.
Fixed-rate loans: With a fixed-rate private student loan, your interest rate is set when you take out the loan and it won’t change over the life of the loan. The rate you lock in can depend on market rates, the lender, your credit and the loan’s terms.
“In general, a fixed-rate loan is a better long-term option for financing your education,” says Fleischman. “You are able to plan for future payments without worrying that interest rates may increase payments faster than your income increases.”
Variable-rate loans: The same factors that may determine your interest rate with a fixed-rate private student loan can impact your initial interest rate when you take out a variable-rate loan. However, with variable-rate loans, your interest rate may rise or fall in the future.
Variable-rate loans’ interest rates are tied to an index, such as the prime rate, 11th District Cost of Funds Index or the London Interbank Offered Rate. The lender adds a margin to the index to determine your total interest rate. There may be a limit to how high or low your interest rate can go.
Variable-rate student loans tend to have a lower initial interest rate than fixed-rate loans and could remain lower. However, you’re taking on risk because the loan’s interest rate could rise, causing your monthly payment and total cost of borrowing to increase.
A variable-rate loan may be best for those who can quickly repay the loan, which will limit your risk, or those who can afford higher monthly payments if the interest rate rises.
Drawbacks of Private Student Loans
Private student loans can help cover a gap in funding that some students need to fill. However, private student loans have drawbacks when compared to federal student loans.
Credit-based decision: Private student loan eligibility and terms depend on the applicant’s credit. Without a creditworthy co-signer, many students may not be able to get approved, or may only be able to get a high interest rate.
Risk for co-signers: Co-signers take on additional debt and risk when they add their name to a private student loan. Co-signing could affect one’s ability to qualify for other loans, and if the student isn’t able to make a payment, it could hurt the co-signer’s credit. In some cases, the co-signer will be responsible for the debt even if the student dies or is permanently disabled.
Potentially higher interest rates: In some cases, private student loans may offer lower interest rates than federal student loans, but that’s not always the case.
Interest rate accrual: With subsidized federal loans, the government will pay the interest while you’re in school and when the loans are in deferment. With private student loans, you’ll accrue interest during these periods.
No guaranteed hardship options: “The difference between unsubsidized loans and private loans is deeper than the accrual of interest,” says Fleischman. “Unsubsidized loans come with federally mandated periods of in-school deferment, forbearance opportunities and a variety of income-driven repayment options.” Some private student loan lenders offer deferment or forbearance options, but they might not be as lenient or lengthy as your options with federal student loans.
No forgiveness programs: There are several federal student loan forgiveness and cancellation programs that aren’t available with private student loans.
Shorter default period and little recourse: If you default on a private student loan, the entire loan balance becomes due immediately. Federal student loans default after 270 days of nonpayment, and when they do, you may have several options for getting your loans out of default.
Private student loans can default after one missed payment. You may be able to repay the late balance and bring the account current before the lender charges it off, often around four to six months, depending on the lender. However, federal student loan programs can be much more forgiving.
Choosing the Best Private Student Loan
Based on recommendations from the Federal Trade Commission, the Consumer Financial Protection Bureau, the U.S. Department of Education and thousands of consumer reviews, there are four key areas you should focus on when comparing private student loan lenders:
- Product offerings
- Additional features
Once you’ve determined the type of student loan you’ll need, and about how much you want to borrow, check to see that the lenders’ offerings match your requirements. You can then compare their loan terms and limits to narrow down your list.
Research lender eligibility requirements including citizenship status, enrollment, income and credit history. You should make sure you’re likely to qualify for a student loan before you apply. Student loan eligibility requirements typically include:
- Citizenship status: Private student loans are generally only available to U.S. citizens, U.S. nationals and permanent resident aliens. International students may be eligible if they have a U.S. citizen, national or permanent resident alien co-sign the loan.
- Enrollment: Lenders may only offer loans to students who are enrolled at least half time within an eligible school.
- Age: You must meet the age of majority in your state of residence or have an eligible co-signer.
- Income: There may be income requirements, including debt-to-income ratio requirements, that you or your co-signer must meet.
- Credit history: With private student loans, your credit history and score can determine your eligibility for a private loan and the interest rate you’ll receive. If you don’t have good credit or haven’t yet established any credit, you may need to have a creditworthy co-signer, such as a parent or other trusted relative. Your co-signer’s credit will be considered with your application. This makes the co-signer legally responsible for the student loan.
The cost of your private student loan will depend on a variety of factors, including your interest rate and the type of interest you choose. Look closely at fees to calculate how they’ll impact your total cost of borrowing.
Some lenders offer preapprovals, which will give you an estimated interest rate without hurting your credit. It’s worth getting a preapproval if it’s an option, as you may not be eligible for the lowest advertised rates. With a preapproval, you can reliably find out the interest rate you’ll be offered by each lender.
Lenders often have fees for applying or taking out your loan. Not all lenders charge these, but you should always read the loan terms closely to identify potential fees, such as:
- Application fee: The lender may charge a non-refundable fee to process your application.
- Origination fee: Origination fees, sometimes called disbursement fees, aren’t common on private student loans. If the lender charges one, it’s usually a fee that’s equal to a percentage of the amount you borrow.
- Late fee: A fee required if your monthly payment is late. It may be a percentage of the amount due with a maximum amount, such as $15 or $25.
Interest capitalization isn’t a fee, but how and when your interest is capitalized (becoming part of your loan principal) will influence your loan’s total cost.
Some lenders let you forgo loan payments during school and for the first several months after graduation. Interest accrues on your loan principal, and when your interest capitalizes, your principal increases. As a result, you’ll accrue more interest each month.
Interest capitalization also happens if you stop making payments, but continue to accrue interest in the future, such as when you put your loans into forbearance or deferment or stop making payments.
One thing you don’t have to worry about with student loans is a prepayment penalty.Unlike some other types of loans, such as a mortgage or personal loans, lenders aren’t allowed to charge you a fee if you pay off your student loan early.
The fine print in private student loans can vary from one lender to another. Some benefits or features could make it easier to repay the loan, lower your interest rate or make a lender a better option for other reasons.
- Autopay savings: Many lenders offer an interest rate discount if you sign up for autopay. The discount is often 0.25 or 0.50 percent, however, it may not take effect until you start making full principal and interest payments.
- Other savings opportunities: Some lenders offer a discount if you have another financial product with them, such as a loan or bank account.
- Early repayment options: Private student loans start to accrue interest as soon as they are dispersed. Some lenders have repayment plans that start while you’re in school. Making interest-only payments, full payments or a fixed monthly payment will help lower your loan balance before you graduate.
- Deferment options: You might be able to defer making any payments while you’re in school. Lenders may offer a grace period after you graduate or drop below half time and you won’t need to make full payments until the grace period ends.
- Deferment due to financial hardship: You may be able to defer your student loan payments if you go back to school, join the military or can’t afford payments due to another covered reason, such as a job loss.
- Discharge due to death or permanent disability: Find out whether your loan balance passes on to your estate or co-signer if you die before it’s repaid. Also, find out what happens if you become permanently disabled and can’t afford to repay the debt.
- Co-signer release: Lenders may release the co-signer from the loan after the student makes a series of on-time payments and if he or she qualifies to take on the loan.
How to Get a Private Student Loan
You’ll go through a few major steps to obtain a student loan. When you apply, you’ll need to meet the eligibility requirements, provide documentation and go through processing before approval and disbursement.
1. Eligibility: The lender will verify basic eligibility for the loan, including citizenship status and enrollment. With further documentation, your income, credit history and other eligibility factors will be verified.
2. Required documentation: You’ll need to provide personal and financial information when you apply for a private student loan. Having documentation available ahead of time could make your application process easier.
Documentation required by lenders may include:
- Your name, address, phone number and email address
- Your date of birth and Social Security number
- A recent pay stub or other form of proof of income
- Bank account balances
- Your monthly housing payment (rent or mortgage)
- Your employer’s name, phone number and length of employment (if applicable)
- Your school’s name and estimated cost of attendance
- Your year in school and period of enrollment
- The amount of financial aid you’ve received (you can find this on the award letter from your school)
- Your anticipated graduation date, loan period and the loan amount needed
- Co-signer name and valid email address (if applicable). Your co-signer may need to share a lot of the same information with the lender.
3. Processing: Many private student loan lenders let you submit your application online. You may get a decision back within a few minutes after the lender analyzes your credit, finances and other eligibility criteria. Or, you may need to submit additional supporting documents or information if the lender has any questions.
4. Approval and disbursement: Once you’re approved for a private student loan, you can choose the interest rate type, loan term and repayment plan. Once you decide on these items, you and your co-signer (if applicable) will accept the terms of the loan and sign the loan agreement.
The lender will contact your school to verify that you’re eligible for the loan amount you requested. Depending on the school, it could take about two to five weeks for the lender to hear back. The school then schedules the disbursement dates and amounts for the loan.
Private student loans will be sent directly to the school. If your loan amount exceeds what you owe the school for that semester, you may receive a refund for the difference. You could return your refund to the lender, lowering your loan amount, or you can spend it on education-related expenses, such as room, board or books.
Best Private Student Loans of 2018
Using data sourced from the Federal Deposit Insurance Corp., National Credit Union Administration and Tracxn, U.S. News compared the top banks, credit unions and non-bank lenders that offer private student loans in at least 10 states. Each lender was reviewed on product offerings, eligibility, cost and additional features.
Each student has unique funding needs, so there is no single lender that is a good choice for all students. U.S. News identified the leading student loan companies with strengths in key areas, including multiyear borrowing, competitive interest rates, repayment assistance, discounts and parent loans. These lenders are a good starting point for your private student loan research.
- Best for multiyear borrowing: Citizens Bank
- Best for offering a variety of loan terms: College Ave Student Loans
- Best for giving back: CommonBond
- Best for competitive interest rates: Connext
- Best for repayment assistance options: Discover Student Loans
- Best for getting a jump start on repayments: LendKey
- Best for low-balance loans: PNC
- Best for releasing co-signers: Sallie Mae
- Best for parent loans: SoFi
- Best for discounts: SunTrust
Top Lender for Multiyear Borrowing
A traditional bank, Citizens Bank offers a wide variety of financial services. You can get basic checking and savings accounts, as well as student loans or student loan refinancing. And you might even get rewarded for having multiple Citizens Bank accounts.Best Features:
Many lenders, including Citizens Bank, offer a 0.25 percent interest rate discount if you sign up for autopay. Citizens Bank offers an additional 0.25 percent reduction if the borrower or a co-signer has a qualifying account (such as a loan or checking account) when you submit your completed application. The discount is applied when your loan is approved, and still applies even if you close the qualifying account.
Citizens Bank offers multiyear approval. If you qualify, you can fund your schooling without having to apply for loans each year. However, you may still want to compare options each year to make sure Citizens Bank is offering you the best rates and terms currently available.
One area where Citizens Bank shines is its wide offering of student loan types, including undergraduate, graduate, professional and medical. It also tailors the loan offering to meet students’ needs. For example, business and law students may be able to borrow up to $225,000 in federal and private loans.
Even with autopay and loyalty discounts, the lowest possible APRs on Citizens Bank’s student loans are higher than those from other lenders. If you think you’ll qualify for the best terms, you may want to consider a different lender.
If you face a financial hardship after graduating, deferment requests are handled on a case-by-case basis. Other lenders often have clear guidelines for when you’ll likely be eligible for deferment.
Best for People Who:
- Have, or will get, another Citizens Bank product loan or account
- Are comparing lenders that offer a wide variety of loan types
- Need to take out loans for medical school
- Want to apply for multiyear loans
- Loan types: Undergraduate, graduate, MBA, law school, medical, dental and parent loans
- Rate types: Fixed and variable rates for undergraduate loans with 0.50 percent autopay discount
- Loan terms: Five, 10 or 15 years
- Minimum loan: $1,000
- Application or origination fees: No
- Autopay discount: 0.25 percent
- Other savings opportunities: 0.25 percent interest rate discount if you or a co-signer have a qualifying Citizens Bank account when you submit your application
- Early repayment options: Full payment, interest only or deferred
- Deferment options: In-school deferment and up to six months after graduation or leaving school
- Deferment due to financial hardship: Yes, on a case-by-case basis
- Discharge due to death or permanent disability: Yes
- Co-signer discharge due to death or permanent disability: Yes
- Co-signer release: After 36 consecutive full payments if you meet the eligibility, credit and income requirements