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Private loans

What is a Private Student Loan?

Updated 11/23/21

If you are researching for ways to pay for college, you may want to consider a private student loan. Private student loans are a financing option typically used to help bridge the gap between the actual cost of education and the financial aid received from grants, scholarships and federal student aid.


When considering a private student loan, it is important to understand all aspects of the loan, the application process, and its repayment requirements. The information provided below can help answer some of the questions that you may have regarding private loans.


How Do I Apply for Private Student Loans?

You’ll apply for private student loans through a private lender, bank or agency. After filling out the application, your lender will run a credit check to determine if you (and, if needed, your cosigner) are approved. Each lender sets their own eligibility requirements that you’ll need to meet.

Many student loan borrowers start by applying for federal student loans, only to find that the aid they qualify for isn’t enough to cover the full cost of their education. After you’ve exhausted all scholarship and grant options, and reached the federal borrowing limit, private student loans could help bridge the financial gap.


How Private Student Loans May Differ from Federal Student Loans


  • Higher borrowing limits: Unlike federal loans, private loans allow you to borrow up to the cost of attendance minus any other aid you may be receiving. This is determined by the school you attend, and the costs associated.
  • Different application process: When you apply for private loans, you’ll need to apply directly with your bank or private lender.
  • Interest rates: Federal student loan interest rates are set by the government. If you have excellent credit or can apply with a cosigner, you may qualify for low-interest rates with a private student loan.
  • Flexible borrowing terms: Federal student loans have set loan terms and interest rates. Private loans generally offer you the flexibility of choosing your interest rate type as well as your repayment term and repayment type.

Combining Private Student Loans and Federal Student Loans

Many college students utilize both private student loans and federal loans to pay for school. It’s important to understand the difference between the two.


Federal loans are offered by the U.S. Department of Education and tend to come with low fixed interest rates. You’ll have to fill out the Free Application for Federal Student Aid (FAFSA) to apply. The FAFSA is not required for a private student loans, but you should only pursue private student loans once you have exhausted all federal aid, savings for college and scholarships.


With federal loans, the rates and terms you receive are set by the government. In comparison, the rates and terms you receive on private loans will depend on your credit history and your lender’s eligibility requirements.


Private student loans   Federal student loans  
Offered by a private lender   Offered by the U.S. Department of Education  
Fill out an application to apply   Fill out the FAFSA to apply  
Rates are based on a borrower’s creditworthiness   Rates are set by the federal government  
May be able to borrow up to cost of attendance, minus financial aid received   Borrowing limit determined by FAFSA, the school and the Department of Education  


Preparing for a Private Student Loan

When considering a private student loan, it is important to understand all aspects of the loan, the application process and its repayment requirements.


Many students and families have the following questions.


How does a credit score impact a private student loan?

When you apply for a loan, the lender will review your credit history.


Your credit report is a detailed list of your credit history, including any loans and credit cards you have and your payment history. Your credit score, or FICO ® score, appears in your credit report and summarizes the information into a single number. Lenders use this information when evaluating a request for credit.


To help manage debt, as well as protect against identity theft, read your credit report at least once a year. You are entitled to a free credit report every 12 months from each of the three nationwide consumer credit bureaus. Request your free annual report at annualcreditreport.com, or call toll-free at 877.FACTACT (877.322.8228).


Do students need a cosigner?

A cosigner is not always required, but most students — especially those without a substantial credit history —may need a credit-worthy cosigner to qualify.

Some lenders offer an option to release a cosigner from the loan after certain criteria have been met. This criteria is determined by the lender, so be sure to ask.


What kind of interest rate is available on the loan?

Interest rates are based on credit history and vary by lender and loan program.


Many private student loans offer a choice of a variable or fixed interest rate. Variable rates may change monthly or quarterly, which means the monthly payment can increase or decrease as the rate changes.


Fixed-rate loans have a set interest rate for the life of the loan.


What, if any, fees apply to the loan?

Since fees can significantly add to the total cost of your loan, be sure to ask which apply to your loan.


Private student loans may have origination fees based on your credit history. Some may have repayment fees that will be added to your loan balance once your loan enters repayment.


Late fees may also be incurred if a payment is made after the due date.


Are any borrower benefits available?

Some lenders offer borrower benefits that may lower the overall cost of the loan. For example, the interest rate may be lowered if the borrower makes monthly payments through automatic debit. The lender can help determine how to take advantage of any benefits.


What are the responsibilities of a private student loan borrower?


The borrower and, if applicable, the cosigner is responsible for paying back your loan, even if the student doesn’t graduate or cannot find a job after graduating.


It is important to open and read all mail related to a student loan.


The lender or servicer must be notified immediately if:

  • The student has a change in name, address, phone number or Social Security number
  • The student drops below half-time enrollment status
  • The student graduates, withdraws or transfers to another school
  • Loan payments cannot be made as scheduled
  • Deferment is needed


How can information on the loan be accessed?

Most private loan lenders provide secure online access to your account.


How long is the loan repayment period?

Repayment terms are usually set by the lender and range from 5 to 25 years.


Some lenders offer the option to choose the repayment term.


In general, a longer repayment term may allow for a lower monthly payment; however, the overall cost will be higher due to the interest you will pay.


Are deferment options available?

Deferment options vary by lender and loan program.


If the loan offers the ability to defer payments while in school, interest will accrue during any period of deferment.


Interest payments can be made while in school and/or during the grace period. This will help reduce the total amount of interest that accrues on the loan.


How are payments made on the loan?

Many lenders partner with loan servicers to manage private student loans after the loan proceeds have been disbursed. Servicers process payments and deferment requests, and they maintain all records and files.


Shortly before the first loan payment is due, you should receive information from the loan servicer, including the monthly payment amount, due date and where to send it.


It is very important to inform the lender and servicer of any changes in address and/or phone number, as well as enrollment status at school.

What happens if a payment is missed?

If a payment is missed, additional charges may be incurred, such as late fees.


Missing a payment will cause the loan to be delinquent. If payments are missed for a specified period of time, according to the loan agreement, the loan could go into default.


Defaulting on a private student loan can result in consequences for both the student and cosigner, if applicable. The credit scores of the student and, if applicable, the cosigner could be negatively impacted.


If there is difficulty making student loan payments as scheduled, the lender or servicer should be contacted immediately to discuss available options.


Does the loan offer deferment or forgiveness in the event of death or disability?

Some lenders may forgive a private student loan in the event of borrower death or permanent disability. Ask the lender for their specific policies.


Helpful tips

Be sure to keep all documents related to a private student loan, including a copy of the promissory note, disclosure statements showing details about the loan and the repayment information from the loan servicer.


Whenever there are questions, contact the lender or loan servicer for assistance.