How to Get A Private Student Loan in 2024

Higher education costs students an average of $35,331 a year, often paid for through scholarships, grants and federal student loans. However, these avenues may not always be sufficient to fund education costs. This is where private student loans come into play, as they can help a student maximize funds for tuition, miscellaneous fees, living expenses and more.

Private student loans, however, should not be the first choice to fund one’s education. The best use of private student loans is to fill in financial gaps only if funds from other sources are insufficient.

Private student loans are similar to federal student loans, except they originate from private institutions such as banks, credit unions or online lenders. These private student loan lenders can set their criteria and eligibility requirements, typically credit and income checks or co-signers. Additionally, private student loan limits are based on your college’s cost of attendance minus any financial aid, meaning you may be able to borrow more than you can with federal loans.

Despite this, private student loans are beneficial due to their flexibility, as you can choose how to repay the borrowed amount. For instance, you can choose between variable and fixed-rate loans, and between a five or 20-year term. However, your interest rate and approved borrowed amount will depend on your or your co-signer’s credit score.

If the borrower is approved for a private student loan, the lender will transfer the funds to the borrower's university. The money will then be applied to tuition and other fees, and any leftover is given to the borrower to use for other study-related purposes.

Typically, lenders require a co-signer for undergraduate borrowers, who often lack good credit scores and income. A co-signer is another individual who will agree to repay an applicant’s loan. They become equally responsible and legally obligated to repay the loan, which means any late or missed payments can affect both the borrower’s and the co-signer’s credit scores.

Depending on the lender’s policies, borrowers will not have to pay for their loans while attending school. Typically, deferring your loans while you are enrolled results in payments starting six months after graduation or the date when you drop below half-time. However, interest will still accrue once money is received.

Lenders may allow students to borrow up to 100% of their total cost of attendance minus any financial aid, but how much a student can borrow will depend on their qualifications. Generally, lenders will look at an applicant’s credit score, their major and the credit score of their co-signer, if there is one. If a co-signer or the borrower has good credit, some lenders may let an applicant borrow up to the full cost of their education.

However, borrowing the maximum loan amount can come with repercussions. Typically, the average private student loan interest rates range between 6% and 7%, with the maximum being 12.99% among major private lenders. In general, private student loan interest rates are higher than federal student loan rates, which average 5.8%. This means higher monthly payments.

For this reason, private student loans should only be an option after an applicant has exhausted funds from all other sources, such as federal student loans, scholarships, or grants.

Private student loans often come with strict requirements as lenders want to ensure the borrower can repay. Lenders typically assess the following factors to determine if you qualify for a private student loan.

As with any financial decision, some advantages and disadvantages come with private student loans. Understanding them can help you decide if this is the best option for you.

Advantages of Using a Private Student Loan

• It has higher borrowing limits: If your cost of education is high or you do not have many grants or scholarships, private student loans can step in. As most lenders let you borrow up to the total cost of attendance, you can get more flexibility to borrow higher amounts as needed.
• It has fixed or variable interest rate options: Lenders offer you a choice between fixed or variable rates, which can help you plan for future payments.
• It can be advantageous for borrowers with good credit scores: Lenders are more likely to offer you a better deal if you or a co-signer has good credit. This means lower interest rates or fewer origination fees.

Disadvantages of Using a Private Student Loan

• It can be challenging to qualify: Undergraduate students typically do not have the necessary credit scores to benefit from a private student loan, making it harder to obtain.
• It offers fewer opportunities for loan forgiveness: Federal student loans offer forgiveness programs, which can help low-income borrowers. Some loan forgiveness programs include Public Service Loan Forgiveness (PSLF), IDR forgiveness and Teacher Loan Forgiveness.
• It has less flexibility for deferment or forbearance: While private lenders offer options for forbearance if you lose a job or encounter financial hardship of up to one year, federal forbearance can last up to three years. This lack of flexibility can be difficult to manage during difficult economic times.
• It often has higher rates than federal loans: If your credit is not good, private student loans may come with higher interest rates. Compared to federal loans where the interest rate is the same for every student, this can be an added stressor once you make repayments.
• It has less flexible repayment options: Unlike federal student loans, private student loans do not come with flexible repayment plans. Federal loans have an income-based repayment (IBR) plan and a Revised Pay As You Earn Repayment (REPAYE) option, both of which recalculate your payments based on your income.

Private student loans can be advantageous for the right borrower, but understanding more about them is essential to decide if they’re best for you. Review the most frequently asked questions about private student loans below.