If you are researching 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 you may have regarding private student loans.
How Do I Apply for Private Student Loans?
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 remaining financial gap.
The first step when pursuing private student loan options, is to apply for a loan 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.
How Private Student Loans May Differ from Federal Student Loans
Though both private student loans and federal student loans provide you with ways to pay for college, it’s important to understand how they differ.
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- 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. Your lender will determine your limit based on 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. Federal loans are identified as a result of the completion of the Free Application for Federal Student Aid (FAFSA).
- Interest rates: The government sets federal student loan interest rates. 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 student 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 FAFSA to apply and receive a FAFSA award letter. The FAFSA is not required for private student loans, but completing your FAFSA is an important first step in your financial journey to pay for college.
With federal student loans, the rates and terms you receive are set by the government. In comparison, the rates and terms you receive on private student 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
It’s understandable that there are a lot of questions that come up when you’re exploring getting a private student loan to help pay for college. We’ve put together a few of the most commonly asked questions and answers below to help give you the confidence to know how to best move forward for your unique situation.
Q: How does a credit score impact a private student loan?
A: 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 – Equifax, TransUnion and Experian. Request your free annual report at annualcreditreport.com, or call toll-free at 877.FACTACT (877.322.8228).
Q: Do students need a cosigner?
A: 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. These criteria are determined by the lender, so be sure to ask.
Q: What kind of interest rate is available on a private student loan?
A: Private student 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.
Q: What, if any, fees apply to the loan?
A: 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.
Q: Are any borrower benefits available?
A: 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.
Q: What are the responsibilities of a private student loan borrower?
A: 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 — whether digital or physical — 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, especially if the loan was initially obtained for a student with a full-time enrollment status
- The student graduates, withdraws or transfers to another school
- Loan payments cannot be made as scheduled
- Deferment is needed
Q: How can information on the loan be accessed?
A: Most private loan lenders provide secure online access to your account.
Q: How long is the loan repayment period?
A: The lender is typically responsible for setting repayment terms, ranging 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.
Q: Are deferment options available?
A: 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.
You can make interest payments while in school and/or during the grace period. This will help reduce the total amount of interest that accrues on the loan.
Q: How are payments made on the loan?
A: 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.
Q: What happens if a payment is missed?
A: 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 could negatively impact the credit scores of the student and the cosigner.
If you are struggling to make student loan payments as scheduled, contact the lender or servicer immediately to discuss available options.
Q: Does the loan offer deferment or forgiveness in the event of death or disability?
A: Some lenders may forgive a private student loan in the event of borrower death or permanent disability. Ask the lender for their specific policies.
A few last helpful tips:
Be sure to keep all documents related to a private student loan. This includes a copy of the promissory note, disclosure statements showing details about the loan and the repayment information from the loan servicer.
If you have questions, contact the lender or loan servicer for assistance.
Learn more about if a private student loan is the right choice for you.