There’s no doubt about it: College is expensive. With average annual costs ranging from nearly $10,000 to more than $30,000, figuring out how to pay for school can be overwhelming.
When researching student loans, you’ll discover that there are two different types: private and federal. But what is a private student loan exactly, and how does it differ from federal debt?
Private and federal student loans have several similar features, but there are also some important differences between the two. Here’s what you should know before you take out a private loan.
What is a private student loan?
Private student loans are offered by private lenders, such as your local bank, a national bank, an online lender, or a credit union. Federal student loans, on the other hand, are offered through the U.S. Department of Education.
Private student loans can be used to cover your higher education costs, whether you’re in an undergraduate or graduate program. There are also private student loans that cover other costs. If you have to study for the bar as a law student or complete your residency after medical school, for example, there are private student loans to help you afford these obligations.
Many lenders offer private loans to both students and parents. However, students might have difficulty qualifying for a loan on their own.
To get a private student loan, you’ll need a good credit score and proof of income. You could also qualify with a cosigner. The cosigner is jointly responsible for paying back the loan, so you and any potential cosigners need to have a serious discussion about risks and plans for repayment.
What’s the difference between a federal and private student loan?
Each private lender sets its own qualifications for a loan. But the government sets the rules for federal student loans. Here are some key ways private and federal student loans differ:
- Private student loans can have fixed or variable interest rates. Rates vary from lender to lender. Federal loans, however, all come with fixed interest rates.
- Your credit score and income will determine your interest rate when you apply for a private student loan. You might need a cosigner if you don’t qualify on your own. For federal student loans, all qualified applicants receive the same interest rate, regardless of their credit score or income.
- Repayment terms on private loans vary from lender to lender; most give you between five and 20 years to repay your loans. Federal student loans, on the other hand, come with various repayment options. For example, you can choose from the 10-year Standard Repayment Plan or income-driven repayment (IDR) plans that set your monthly payments based on your income.
- Most private lenders do not offer loan forgiveness. But federal student loans could be forgiven in certain cases. For example, if you work in public service or make regular payments under an IDR plan, a portion of your loans could be forgiven after 10 or more years.
For more details about the differences between private and federal student loans, check out this guide.
Pros and cons of private student loans
Federal loans offer more protections to borrowers than private loans. But this doesn’t mean private loans don’t play an important role in funding educational costs. Private student loans have one big advantage: You can typically borrow as much as the school-certified cost of attendance.
Eligibility for federal student aid, on the other hand, is limited based on annual and lifetime limits set by the government. Your school also determines how much financial aid you receive, and the amount you’re awarded could be lower than the maximum federal limits. If you aren’t offered enough federal aid to cover the cost of the school you want to attend, private loans might be the next best option.
The big disadvantage of private student loans, however, is that they lack many of the protections that are offered to federal student loan borrowers. These protections include repayment plans based on your income and loan forgiveness for qualifying public service work.
It can also be a little harder to pick the right private lender. Since loan terms aren’t standardized among private student loans, you need to shop around and compare loan terms. Though private student loans might require more research, it’s easy to compare options since you can apply for them online.
What’s the interest rate on private loans?
When shopping for private lenders, the student loan interest rate you’re offered is a key point to consider. A higher interest rate means you pay more for borrowing money.
Interest rates vary based on different factors, including which lender you choose, whether you opt for a fixed- or variable-rate loan, and what your credit score is. A fixed rate means your loan payments won’t change over time. A variable rate means your interest costs could increase or decrease over the life of your loan.
As of March 2018, interest rates on private student loans range from 2.93% to 12.66%. However, your rate might be higher or lower, depending on your financial details.
When you compare lenders and see the interest rates you’re offered, use our student loan comparison calculator. It can help you compare loan offers.
How can you apply for a private loan?
Now that you can answer the key question of “What is a private student loan?” you might decide you’re ready to apply for one.
Applying is easy; most lenders allow you to submit applications online. You must provide information on your credit, income, and assets when applying. If you have a cosigner, you’ll need to submit their information, too.
You’ll usually get a decision within a few minutes, but the lender will need to work with your school to verify loan amounts and arrange disbursal. Money from private loans will be sent to your school to cover tuition costs, and any leftover funds will be distributed to you to help pay for books, housing, or other related school costs.
You’ll need to decide if you want to start making loan payments right away or if you plan to wait until graduation to begin repayment. Hopefully, you’ve borrowed only what you needed. That way, repayment will be affordable for your budget.
Need a student loan?Here are our top student loan lenders of 2019!
|1 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
2 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Information advertised valid as of 2/1/2019. Variable interest rates may increase after consummation.
3 Important Disclosures for Discover.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2019 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
6 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
7 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
8 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|4.23% – 13.23%1||Undergraduate and Graduate|
|4.20% – 11.44%2||Undergraduate, Graduate, and Parents|
|4.84% – 13.49%3||Undergraduate and Graduate|
|4.50% – 10.11%*,4||Undergraduate and Graduate|
|4.25% – 13.25%5||Undergraduate and Graduate|
|5.85% – 6.99%6||Undergraduate and Graduate|
|3.95% – 9.81%7||Undergraduate, Graduate, and Parents|
|4.45% – 12.42%8||Undergraduate, Graduate, and Parents|