A Guide to Private Student Loans (2024)

The average cost of college in the U.S. is $36,436 per year, including books, supplies, and daily living expenses, according to the Education Data Initiative. While grants and scholarships can significantly lower your out-of-pocket expenses, they typically don’t cover the full cost of your college education.

Student loans, both federal and private, can help bridge this gap in financial aid to allow you to attend the college of your choice. Federal student loans are funded by the government. They tend to offer the best rates and terms but come with borrowing limits. If you still have gaps in funding, you can turn to private student loans.

Private student loans are funded by banks, credit unions, and online lenders. Private lenders set their own eligibility criteria, and interest rates generally depend on a borrower’s creditworthiness. While private student loans don’t offer all the same borrower protections as federal loans, they can still be a smart choice to help you pay for educational expenses, as long as you do your research.

This guide offers private student loan basics, including what they are, how they work, their pros and cons, and how to apply for one.

What are Private Student Loans?

Often when people talk about student loans, they’re referring to federal student loans, which are provided by the federal government. Private student loans, by contrast, are given out by individual banks and lenders. Students typically turn to private student loans when federal loans won’t cover all of their costs.

You can use the money from a private school loan to pay for expenses like tuition, fees, housing, books, and supplies. Interest rates for private student loans may be variable or fixed and are set by the lender. Repayment terms can be anywhere from five to 20 years.

How Do Private Student Loans Work?

Loan amounts, interest rates, repayment terms, and eligibility requirements for undergraduate private student loans vary by individual lenders. If you’re in the market for a private student loan, it’s key to shop around and compare your options to find the best fit.

To get a private student loan, you need to file an application directly with your lender of choice. Based on the information you submit, the lender will determine whether or not you are approved and, if so, what rates and terms you qualify for.

If you’re approved, the loan proceeds will typically be disbursed directly to your university. Your school will apply that money to tuition, fees, room and board and any other necessary expenses. If there are funds left over, the money will be given for you to use toward other education-related expenses, such as textbooks and supplies.

Repayment policies vary by lender but typically you aren’t required to make payments while you’re attending school. Some lenders will allow you to defer payments until six months after you graduate. However, interest typically begins accruing as soon as the loan is dispersed. Similar to unsubsidized federal student loans, the interest that accrues while you’re in school is added to your loan balance.

The Pros and Cons of Private Student Loans

If federal financial aid — including grants, work-study, and federal student loans — isn’t enough to cover the full cost of college, private student loans can fill in any gaps. Just keep in mind that private student loans don’t offer the same borrower protections that come with federal student loans. Before taking out a private student loan, it’s a good idea to fully understand their pros and cons.

The Benefits of Private Student Loans

Here’s a look at some of the advantages that come with private student loans.

Apply Any Time of the Year

Unlike federal student loans, which have application deadlines, you can apply for private student loans any time of the year. As a result, they can be helpful if you’re facing a mid-year funding shortfall or if your college expenses go up unexpectedly.

Higher Loan Amounts

Federal loans have annual maximums. For example, a first year undergraduate can borrow up to $5,500. The aggregate max you can borrow from the government for your entire undergraduate education is $31,000. Private student loan limits vary with each lender, but you can typically borrow up to the full cost of attendance minus any financial aid received.

Choice of Fixed or Variable Interest Rates

Federal loans only offer fixed-rate loans, while private lenders usually give you a choice between fixed or variable interest rates. Fixed rates remain the same over the life of the loans, whereas variable rates can change throughout the loan term, depending on benchmark rates.

Variable-rate loans usually have lower starting interest rates than fixed-rate loans. If you can afford to pay off your student loans quickly, you might pay less interest with a variable-rate loan from a private lender than a fixed-rate federal loan.

Quick Application Process

While federal student loans require borrowers to fill out the Free Application for Federal Student Aid, or FAFSA, private student loans do not. You can apply for most private student loans online in just a few minutes without providing nearly as much information. In some cases, you can get a lending decision within 72 hours. By comparison, it typically takes three to five days for the government to process the FAFSA if you submit electronically, and seven to 10 days if you mail in the form.

Statute of Limitations

While you never want to default on your student loans (since it can cause significant damage to your credit), it can be nice to know that private student loans come with a statute of limitations. This is a set period of time that lenders have to take you to court to recoup the debt after you default. The time frame varies by state, but it can range anywhere from three to 10 years. After that period ends, lenders have limited options to collect from you.

However, that’s not the case with federal student loans. You must eventually repay your loans, and the government can even garnish your wages and tax refunds until you do.

Options for International Students

International students typically don’t qualify for federal financial aid, including federal student loans. Some private lenders, however, will provide student loans to non-U.S. citizens who meet specific criteria, such as attending an eligible college on at least a half-time basis, having a valid student visa, and/or adding a U.S. citizen as a cosigner.

The Disadvantages of Private Student Loans

Private student loans also have some downsides. Here are some to keep in mind.

Requires a Cosigner

Most high school and college students don’t make enough income or have a strong credit history to qualify for private student loans on their own. Though some lenders will take grades and income potential into consideration, most students need a cosigner to qualify for a private student loan. Your cosigner is legally responsible for your student debt, and any missed payments can negatively affect their credit. If you can’t repay your loans, your cosigner is responsible for the entire amount.

The good news is that some private student loans allow for a cosigner release.That means that after you make a certain number of on-time payments, you can apply to have the cosigner removed from the loan.

Less Flexible Repayment Options

Federal student loans offer several different types of repayment plans, including Income-Driven Repayment (IDR) Plans, which calculate your monthly payment as a percentage of your income. With the new Saving on a Valuable Education (SAVE) Plan, for example, your monthly payments are generally equal to 5% of your discretionary income (which is the extra income you have after paying for basic necessities).

With private student loans, on the other hand, usually the only way to reduce your monthly payment is to refinance the loan to a lower interest rate, a longer repayment term, or both.

No Loan Forgiveness Programs

Federal student loans come with a few different forgiveness programs, including Public Service Loan Forgiveness (PSLF), IDR forgiveness. and Teacher Loan Forgiveness. While these programs have strict eligibility requirements, they can help many low-income borrowers. Private lenders, however, generally don’t offer programs that forgive your debt after meeting certain requirements.

If you’re experiencing financial hardship, however. the lender may agree to temporarily lower your payments, waive a payment, or shift to interest-only payments.

Can Lead to Over-Borrowing

Private loans typically allow you to borrow up to 100% of your cost of attendance, minus other aid you’ve already received. Just because you can borrow that much, however, doesn’t necessarily mean you should. Borrowing the maximum incurs more interest over the duration of your loans and increases your payments, which can make repayment more difficult.

Not Always Discharged in Death or Disability

Federal loans are discharged if the borrower passes away, which means that the debt will be cleared and won’t count against the borrower’s estate. With private student loans, however, lenders can try to collect any outstanding loan amounts against a borrower’s estate in the event of death. They can’t, however, try to collect from a relative who did not cosign the debt.

Also keep in mind that your private loan could go into automatic default if your cosigner passes away, even if you’ve been making your payments on time.

No Federal Subsidy

Subsidized federal student loans, awarded based on financial need, come with an interest subsidy, meaning the government pays your interest while you’re in school and for six months after you graduate. This can add up to a significant savings.

Subsidies don’t exist with private student loans. Interest accrues from day one; in some cases, you might need to make interest payments while still in school. If you don’t pay the interest as you go, it’s added to your debt as capitalized interest when you finish school. (This is also the case with federal unsubsidized loans.)

Federal vs Private Student Loans

Here’s a look at the key differences between federal vs. private student loans.

The Application Process

Federal student loans are awarded as a part of a student’s financial aid package. In order to apply for federal student loans, students must fill out the FAFSA each year. No credit check is needed to qualify.

To apply for private student loans, students need to fill out an application directly with their preferred lender. Application requirements may vary depending on the lender. A credit check is typically required.

Recommended: Financial Aid vs Student Loans

Interest Rates

The interest rates on federal student loans are fixed and are set annually by Congress. Once you’ve taken out a federal loan, your interest rate is locked for the life of the loan.

For the 2023-2024 school year, the interest rate on Direct Subsidized or Unsubsidized loans for undergraduates is 5.50%, the rate on Direct Unsubsidized loans for graduate and professional students is 7.05%, and the rate on Direct PLUS loans for graduate students, professional students, and parents is 8.05%. The interest rates on federal student loans are fixed and are set annually by Congress.

Private lenders, on the other hand, are free to set interest rates. Rates may be fixed or variable and depend on several factors, including your (or your cosigner’s) credit score, loan amount, and chosen repayment term. Private student loan rates range anywhere from 2.99% to 14.96% APR for fixed-rate loans and 2.99% to 14.86% APR for variable-rate loans.

Repayment Plans

Borrowers with federal student loans can select from several different federal repayment plans , including income-driven repayment plans. You can defer payments while enrolled at least half-time and immediately after graduation

Repayment plans for private loans are set by the individual lender. Many private student loan lenders allow you to defer payments during school and for six months after graduation. They also have a variety of repayment terms, often ranging from five to 20 years.

Options for Deferment or Forbearance

Federal student loan borrowers can apply for deferment or forbearance if they encounter financial difficulties while they are repaying their loans. These options allow borrowers to pause their loan payments (interest, however, will typically continue to accrue).

Some private lenders may offer options for borrowers who are facing financial difficulties, including short periods of deferment or forbearance. Some also offer unemployment protection, which allows qualifying borrowers who have lost their job through no fault of their own to modify payments on their student loans.

Loan Forgiveness

Borrowers with federal student loans might be able to pursue loan forgiveness through federal programs such as PSLF or Teacher Loan Forgiveness, or after paying down their balances on an IDR plan for a certain period of time.

Since private student loans aren’t controlled by the government, they are not eligible for federal loan forgiveness programs. Though private lenders will often work with borrowers to avoid default, private student loans are rarely forgiven. Generally, it only happens if the borrower becomes permanently disabled or dies.

Should You Consider Private Student Loans?

There are many different types of student loans. It’s generally a good idea to maximize federal student loans before turning to private student loans. That way, you’ll have access to income-driven repayment plans, loan forgiveness programs, and extended deferment and forbearance periods.

If you still need money to cover tuition or other expenses, and you (or your cosigner) has strong credit, a private student loan can make sense.

Private student loans can also be useful if your expenses suddenly go up and you’ve already maxed out federal student loans, since they allow you to access additional funding relatively quickly. You might also consider a private student loan if you don’t qualify for federal loans. If you’re an international student, for example, a private loan may be your only college funding option.

Another scenario where private student loans can make sense is if you only plan to take out the loan short-term. If you’ll be able to repay the loan over a few years, private student loans could end up costing less overall.

Recommended: When to Apply for Student Loans

How to Get a Private Student Loan

Here’s a look at the steps involved in getting a private student loan.

1. Shop around. Your school may have a list of preferred lenders, but you’re not restricted to this list. You can also do your own research to find top lenders. As you evaluate lenders, consider factors like interest rates, how much you can borrow, the loan term, when you must start repayment, any fees, and if the lender offers any hardship programs.

2. See if you can prequalify. Some lenders allow borrowers to get a quote by filling out a prequalification application. This generally involves a soft credit inquiry (which won’t impact your credit score) and tells you what interest rates and terms you may qualify for. Completing this step can help you decide if you need a cosigner.

3. Gather your information. To officially apply for a private student loan, you typically need to provide your Social Security number, birthdate, and home address, as well as proof of employment and income. You may also need to provide other financial information, such as your assets, rent or mortgage, and tax returns. If you have a cosigner, you’ll have to provide their personal and financial details as well.

4. Submit your application. Once you’ve completed your application, the lender will typically contact your school to verify your information and eligibility. They will then process the student loan and notify you about your approval and disbursem*nt of your money.

💡 Quick Tip: Parents and sponsors with strong credit and income may find much lower rates on no-fee private parent student loans than federal parent PLUS loans. Federal PLUS loans also come with an origination fee.

Does Everyone Get Approved for Private Student Loans?

No. Requirements for private student loans will vary depending on the lender, but generally to qualify you need to:

• Attend an accredited school (this typically includes four-year colleges and, sometimes, two-year community colleges and trade schools).

• Have a strong credit score (usually in the mid-600s or higher).

• Have a steady income that can cover your expenses.

If you don’t meet these qualifications you can apply with a cosigner who does.

Apply for a Private Student Loan with SoFi

Private student loans are offered by banks, credit unions, and online lenders to help college students cover their educational expenses. They are not part of the federal student loan program, and generally do not feature the flexible repayment terms or borrower protections offered by federal student loans. However, private student loans come with higher loan limits, and the borrowing costs are sometimes lower compared to their federal counterparts. If you’re thinking about a private student loan for college, it pays to shop around to find the best rates and terms.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

FAQ

Why would someone get a private student loan?

Students typically turn to private student loans when federal loans won’t cover all of their costs. Private student loans come with higher borrowing limits than their federal counterparts. The aggregate max you can borrow from the government for your entire undergraduate education is $31,000. With private loans, on the other hand, you can typically borrow up to the total cost of attendance, minus any financial aid received, every year. This gives you more flexibility to get the financing you need.

Will private student loans be forgiven?

Private student loans aren’t funded by the government, so they don’t offer the same forgiveness programs. In fact, private student loan forgiveness is rare.

If you experience financial hardship, however, many lenders will work with you to stay out of default. They may agree to temporarily lower your payments, waive a payment, or switch to interest-only payments. Or, you might qualify for deferment or forbearance, which temporarily postpones your payments (though interest continues to accrue).

Are private student loans paid to you or the school?

Typically, lenders will send your private student loan money to your school, which will apply the loan to your current charges. The school will then transfer any balance to you to use towards other costs, such as school supplies and other living expenses.