What Is A Private Student Loan?

Jon O'Donnell Updated on January 6, 2020

A private student loan is a loan that you take out from a private lender (like a bank) to cover college costs. It's easy to get these confused with the federal student loans that you may have been offered after filling out the FAFSA, because federal loans may go by many different names. 

The only way to get a private student loan is by applying directly with the lender. While private student loans can be a good option to cover gaps in college funding, it's wise to exhaust other funding sources first.

Let's talk about what private student loans are, how they work, and how to get one. 

How private loans are different from federal 

When you fill out your Free Application for Federal Student Aid (FAFSA), your eligibility is automatically determined for federal loans. These loans are issued through the U.S. Department of Education, although they are serviced by private companies, such as FedLoan, Great Lakes, and Navient (to name just a few of many.)

Federal loans offer fixed interest rates that are set by law. That means everyone gets the same rate, despite income and credit history (or lack thereof). Federal loans also offer borrower protections like deferment and forbearance, the ability to postpone repayment six to nine months after graduation, and extended- and income-based repayment plans. 

When paying for college, it's best to prioritize your payment options in this order:

  1. Grant and scholarship money that doesn't need to be paid back
  2. Savings
  3. Federal financial aid, such as work study and subsidized and unsubsidized federal student loans
  4. Private student loans
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How private student loans work

Private student loans are are offered by banks and independent lending institutions. The terms of conditions of these loans can differ by quite a bit, since each lender will have its own requirements for:

  • Loan application and approval
  • Interest rates
  • Loan limits
  • Fees
  • Repayment conditions

Check our Best Banks page to view an apples-to-apples comparison of current popular loan options. 

A key difference between private and federal loans is that private loans will be based on your (and potentially your cosigner's) income and credit history. People with a better credit score are generally offered better interest rates. Since most college students haven't built up a credit history, many can only get student loans if they apply with a cosigner. 

How to get approved

Here's the good news: Banks and other private lenders typically make applying for student loans easy. Many lenders offer simple online applications that may offer a conditional approval within minutes. 

Lenders require a number of things in order to provide you with funds for college. Most students will apply with a cosigner, such as a parent, guardian, or other trusted adult. 

To qualify for a student loan, you will need to provide multiple pieces of information and documentation. In general, that includes:

  • Proof that you're enrolled at an eligible school
  • Proof that you're a U.S. citizen or permanent resident of legal age as defined by your state of residence
  • Tuition and fees for the school you plan to attend
  • Estimate of the financial aid you have already been approved for, which can be found on the financial aid letter you should've received after your college acceptance

Applying without a cosigner

If you're applying on your own, i.e., without a cosigner, you'll probably need to provide this info as well:

  • Proof of income
  • Proof of employment
  • Proof of credit-worthiness

Tip: Even if you can get approved for a private student loan without a cosigner, you may want to add one to help reduce your interest rate. Many private lenders will allow a cosigner to be released from the loan once a total of 24 consecutive, on-time payments have been made.

Applying with a cosigner

To help you qualify for a student loan, a parent, spouse, or family friend can cosign the student loan application with you. Your cosigner agrees to share the responsibility for repaying the loan if you are unable to make those payments.

A cosigner must:

  • Have a verifiable income
  • Show a good credit history of borrowing, charging, and repayment with few or no late payments on their credit report
  • Exhibit no excessive delinquencies, judgments or bankruptcies pending, filed or discharged in the past two years
  • Have no prior student loan defaults
  • Be a U.S. citizen and at least 18 years of age 

How much can you borrow?

Many lenders restrict private student loan borrowing to your total cost of attendance, minus financial aid.

However some simply have a yearly loan cap, leaving it up to you to decide how much debt is too much.

But remember, it's wise to borrow only the amount you’ll need, rather than the maximum you can get. Reducing what you take out in student loans is a key strategy for ensuring that you'll be able to handle your student loan payments after graduation. Plus, it's important to remember that you generally cannot discharge student loan debt in a bankruptcy. That means you'll be on the hook for whatever you borrow, so your future self will thank you for being conservative. 

When do you have to start paying your student loan back?

The grace period on a private student loan depends on the lender and your loan contract.

Some private student loans have a short grace period, allowing you to defer payments until after you finish school. Other student loans require repayment immediately after the funds have been disbursed, that is, while you're still in school. The loan agreement spells out all the specifics about when payment will begin.

Keep in mind that making payments during school, even if they're interest-only payments, can help reduce your total loan cost down the road. 

What happens if you can't pay back the loan?

First, consider the positives of on-time student loan repayment: You effectively build your credit.

However, if you find making your payments becomes difficult, contact your lender. You may learn about options that make repayment more manageable. DO NOT just miss a payment without contacting your lender.

But what happens if you just can't pay your private student loan? Late payments can be reported to all consumer credit reporting agencies, which can adversely affect your credit score.

If you stop making payments, after 120 days your loan is considered in default and your lender can:

  • Demand immediate payment of the full balance of the loan
  • Seek repayment from your cosigner
  • Refer your account to a collection agency
  • Charge additional fees, and
  • Report your default to credit bureaus.
Finally, your student loan debt cannot be dismissed, even in bankruptcy.

Your guide to private student loans

Get all the information you need about private student loans, for free, in our easy-to-read guide

Published in: Private Student Loans

About the Author
Jon O'Donnell

Jon is a writer and marketer for Nitro who is passionate about bringing transparency to the student loan process along with providing families with the information needed to make smart financial decisions. He also just recently refinanced his student loans allowing him to pay them off 5 years faster all while saving an additional $152/month. As he continues to pay them off himself, he strives to help others do the same. Jon also has a long history of connecting people with educational opportunities to help them improve their careers and their overall personal finances. In his free time you can find him reading travel blogs and researching destinations around the world in search of his next adventure. Read more by Jon O'Donnell

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