Guide to Private Student Loans

Private student loans are loans that are not offered as part of any government program. They’re simply loans offered by banks and other lenders with the intent of funding your education. You generally have to be enrolled to use student loans, but some private loan programs allow you to borrow even after graduation. Before using private loans, learn how they work and what the pros and cons are.

Federal vs. Private Student Loans

In general, it’s best to start with federal student loans before moving on to private student loans. Government loan programs have certain advantages that you can’t find in the private loan market. There are, of course, tradeoffs, but most students are better off maximizing the federal loans available to them before even considering private loans. Federal loans come with some protections that private loans don't. For example, student loan payments and interest are suspended through Dec. 31, 2020, as a result of President Trump's executive order to help borrowers during the global health crisis.

Of course, it’s also best to borrow as little as possible. Student loans are relatively easy to come by—especially government-sponsored loans. Unfortunately, you’ll have to pay all that money back someday, and it may be more difficult than you think to come up with the cash. Try to minimize your borrowing or avoid it altogether if you can.

If you need student loans to pay for college, and what you're offered from the government isn't enough, private student loans may be able to help.

Private Student Loans

Why would you choose or avoid a certain type of loan? Two factors that may come into play are:

  • Qualifying for the loan
  • Amounts available to borrowers

Federal student loans are easy to get—you don’t need any credit history or any proof of income for certain loan programs. The government is willing to lend you money as long as you’re in school.

Private student loans, on the other hand, require relatively good credit. If you don’t have a credit history—or if you have bad credit—it’s unlikely that you’ll get a private student loan. However, it may still be possible to borrow with the help of a co-signer.

While government loans are easy to qualify for, they may not be sufficient to cover your costs. You can’t borrow as much as you want—there’s a dollar limit. For students who borrow to cover living expenses in addition to tuition, fees, and books, it’s easy to hit the limit.

Students at private colleges and out-of-state students often need more than government programs will provide. Private student loans, on the other hand, allow you to borrow much more—for better or worse.

Other Key Factors

There are other differences between private student loans and government programs. Government programs tend to have lower interest rates, and repayment can be flexible. Private student loans most likely come with variable interest rates, so it may be hard to project what your costs will be.

Refinancing and consolidation can also be different, depending on the types of loans you have. Private loans more or less get refinanced, while government loans can truly be consolidated.

Who's Considered a "Student”?

In some cases, private student loans may be your only option for covering education expenses. To qualify for government loans, you may have to be enrolled at least half-time in certain types of programs (programs that lead to degrees or certificates, for example). Depending on what you’re studying and where you do it, federal loans might not be available.

You might also need money after graduation. While you may not think of this as a “student” loan, some type of funding can come in handy while you get on your feet professionally. For example, you may have to complete licensing programs—passing an industry exam or completing internship hours—before you can begin working for pay. Some private student loans help cover your expenses while you complete these tasks.

Private Student Loans Come With Less Paperwork

You may find that the paperwork is less of a burden with private student loans. For federal loans, you have to complete the FAFSA (an application and set of questions required for certain student aid programs including loans and grants), which requires gathering information about your family and personal finances. Some families prefer not to share this information, and students may prefer not to go through the process for personal reasons. Private lenders can offer loans without a FAFSA. You’ll still have to do paperwork, but their forms may be more palatable to you.

The Bottom Line

Private lenders will have higher standards, so you can only borrow if you have credit and income sufficient to demonstrate that you’ll repay the loan (or an acceptable co-signer). Remember also that government loan programs come with certain benefits that you can’t get with private lenders—it may be worth it to do the FAFSA.