Ultimate Guide to Private Student Loans

Everything you need to know about financing your education with a private student loan.

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Private Student Loans

Over the last decade, college tuition and fees have increased at an average rate of 3.2% beyond inflation. With the costs of education growing faster than other costs of living, private student loans are making it possible for students to bridge the gap.

Private student loans are an alternative to federal student loans, which are originated by the U.S. Department of Education. Depending on your situation, one may be better than the other.

Read on to learn more about private student loans and when they’re worth considering.

What are private student loans?

Ken Ruggiero is the CEO of Goal Structured Solutions, administrator of Ascent Student Loans.

He says, “The main difference between federal and private loans is the administrator.” A federal loan is offered through the federal government while a private loan is offered by a private company or bank.

But that’s not the only difference to know. Here are some key features of private student loans and how they differ from federal loans:

PRIVATE STUDENT LOANS VS. FEDERAL STUDENT LOANS

Compare the features of private and federal student loans.

Private
  • Issued by private student loan companies
  • You can shop around and compare a variety of lenders
  • You don’t need to fill out the FAFSA form to get them
  • Require a credit check and often a cosigner
  • Offer variable and fixed interest rates
  • Don’t offer access to income-driven repayment plans or loan forgiveness programs
Federal
  • Issued by the U.S. Department of Education
  • Only one lender from which you can choose
  • You need to fill out the FAFSA form to get them
  • Most loans don’t require a credit check or cosigner
  • Offer fixed interest rates
  • Offer access to income-driven repayment plans and loan forgiveness programs

Private student loan interest rates

There’s no average interest rate for private student loans. Each lender offers a range of variable and fixed interest rates. That said, the Institute for College Access and Success (TICAS) found private student loan interest rates as high as 13.74% in its latest study on the subject.

The table below shows the range of interest rates offered by leading lenders.

Fixed vs. variable interest rates

For borrowers who want a choice between fixed and variable interest rates, private student loans allow you to make the decision.

Fixed interest rates stay the same throughout the life of the loan. However, they tend to be higher than variable interest rates. That said, they’re best for borrowers who don’t plan to pay off their loans quickly or want more certainty.

Variable interest rates can fluctuate over time as market rates change. So, they start out lower than fixed interest rates.

But keep in mind, there’s little certainty over how market rates will change over time. Variable rates are best for people who plan to quickly pay off their balance or are fine with a potentially higher interest rate over time.

How to get the best private student loan interest rates

“A major benefit of a private student loan is having the ability to shop around for a competitive rate and benefits,” says Ruggiero.

“Unlike federal loans that are locked into a standard rate, private lenders have the flexibility to base interest rates on more factors than federal loan rates.”

Not all private student loan companies offer the same rates, though. So you may have to do some extra research to get the best rates available. But depending on where you are in school and your financial situation, private student loans may offer lower rates than the federal government.

Shop around

One benefit of private student loans is that there are several lenders from which you can choose. Each lender has different criteria for determining which interest rate to offer you.

That’s why it’s wise to shop around and compare rates from several lenders. Most of the top companies allow you to see your rate with a soft credit check. Try to get prequalified with several lenders to narrow down the offers.

Get a cosigner

If you have no credit history or your credit is poor, you’re unlikely to get approved for private student loans. But with a cosigner who has great credit and a solid income, you may have a chance. Even if you have a great credit and financial profile, a cosigner can help you score a lower interest rate.

Choose autopay

Regardless of which lender you choose, most offer interest rate reductions when you set up automatic payments from your checking account.

This is because borrowers on autopay pose less of a risk to lenders than borrowers who make their monthly payments manually. You can expect a reduction of 0.25% to 0.50%, depending on the lender.

While that’s not a lot, it can make a difference over the life of your loan.

Other private student loan features

The interest rates are just one difference between private and federal student loans.

Another significant difference is that private student loans come with varying repayment periods. Depending on the lender, you may choose a repayment term of anywhere from five to 20 years.

Federal loans, on the other hand, have a standard repayment period of 10 years. You can, however, change your term to up to 30 years if you consolidate your loans through the Department of Education or get on an income-driven repayment plan.

While you may need a cosigner to get approved for a private student loan, many lenders offer a cosigner release feature. This allows you to apply to have your cosigner removed from the loan after you’ve made a specific number of consecutive, on-time payments.

As for fees, don’t expect a lot. “Many private loans don’t have fees for application, origination, disbursement, or early payment because of the competitive nature of the industry,” says Ruggiero.

When to consider private student loans

“It’s important to remember that there are various financial aid options to help students and families pay for college,” says Ruggiero. “Financial aid can come in the form of grants, scholarships, federal loans, or private loans typically used in combination to provide financial coverage.”

If you do need to rely on student loans, the main goal should be to pay the least amount of money possible in interest and fees. It’s important to do the math to make sure you’re getting the best deal.

Federal loan programs

As of July 1, 2018, federal loans carry the following interest rates:

Based on your situation and the rate you can get through a private student loan company, one may be better than the other. In some cases, however, you likely won’t need to do much math.

For example, undergraduate students without a cosigner are better off getting federal student loans. This is especially true if they qualify for loans where the federal government subsidized the interest while they’re in school.

But if you’re a graduate or professional student, or a parent helping your undergraduate child, consider comparing the rates the federal government has to offer with rates from private student loan companies.

Even if you think you can get a better deal through private lenders, Ruggiero recommends always checking with the federal government first.

“Students should always file for the Free Application for Federal Student Aid (FAFSA) first,” he says. “For those students and families who have exhausted federal student loan options and scholarships, and still have a funding gap, other private loan options should then be considered.”

This process can take time. But it’s time well spent if you can manage to qualify for a lower interest rate.

How to pick the right private student loan

“Every student’s situation is different,” says Ruggiero, “Therefore, students and families need to develop a financial plan that fits their needs.”

As we’ve already discussed, interest rates are the top priority when deciding on which loan to take out. But it’s also important to consider the other terms and features.

For example, if you need a cosigner, you’ll have a better time convincing someone to do it if your chosen lender has a generous cosigner release program. And if you don’t need a lot of funds, you could save money over time by picking a lender that offers shorter repayment periods.

Also, consider whether a lender has any other special features. For example, some lenders offer cash bonuses when you graduate, and others offer interest rate discounts on other loans.

So you’ll want to take the time to consider whether private student loans are right for you and which lender to choose. By doing so, you’ll have an easier time paying down your debt after you graduate.

And if interest rates are lower when that time comes, you can choose to refinance your student loans to take advantage of the new rates.

College costs

Deciding to go to college or university is a major life decision, one that requires a lot of thought and planning. And if you are a student fresh out of high school, it is probably your first significant capital investment. How are you going to pay for it?

On average, public university tuition costs $26,300 for a four-year degree program, while the average private university costs $100,500 over the same period (source). While grants and scholarships may cover a portion of those fees, it’s inevitable that you will have to borrow some money to fund your education.

There are two categories of student loans—federal government loans and private lender loans—and it is likely you will need a combination of both to cover the full cost of your tuition. Private lender loans for students have been increasing steadily since the 1990’s, and now make up about 7% of the overall student loan market (source). This follows the upward trend of rising tuition costs.

Federal government loans are fairly simple to access. But how do you properly pursue a private student loan?

The private student loan checklist

Private lenders have slight differences in their application and disbursement processes, but they follow the same format.

Step 1: research

There are a large number of private loan lenders available in every state, and they all offer something to somebody. As a student, it’s important to look closely at a variety of lenders to ensure you are finding a good fit. Some helpful questions to ask:

  • Does this lender offer variable or fixed interest rates? Both?
  • Is there a lower interest rate while I am attending school?
  • Is there a cap on variable interest rates?
  • Can I extend or change my repayment period if necessary?
  • Is there job loss protection available with this loan?

These are just a few of the questions to keep in mind when researching potential lenders. Keep in mind that not all lenders will loan to all students. For example, Commonbond only lends to MBA students, and only if they are attending one of 20 specific schools.

It is crucial that you have a good idea of exactly what you are getting into. This is likely going to be a long-term relationship; most loans have repayment periods of up to 20 years! Look at comparisons between different lenders to help you choose your top picks, and keep a list of which application forms you are interested in filling out.

Step 2: application form

This form is where you provide information that a private lender needs to determine whether you qualify for a loan. The required information varies, but includes these basics:

  • Contact: address, phone number, email
  • Personal: date of birth, Social Security Number, yearly income, etc.
  • School: institution, enrolled program, expected graduation date, etc.
  • Cost: the cost of attendance, requested loan amount

These applications are often available online and don’t take very long to complete. Traditionally, lenders charged an application fee, but newer companies like Sofi are shifting away from those additional charges.

Your application information will help a private lender determine your eligibility for a student loan from them. It also allows them to run a credit history check on you, which is a requirement for loan approval.

Step 3: approval

If you have a high credit rating, you have a better chance of success when applying for a student loan. Your rating is determined by your credit report, which is essentially your total financial history—bill payments, current debt load, and whether you’ve ever been sued or filed for bankruptcy, among other things (source).

If you are a young person, or simply don’t have much financial history, your credit rating will naturally be low. This is why most students are approved on the condition that they have an eligible cosigner.

A cosigner is somebody with good credit history and steady income that takes equal responsibility for repaying your loan. Often this is a parent or family member, but can be anybody that you have a close, trusted relationship with. Keep in mind that this person is taking a risk by agreeing to be your cosigner; any payments you miss on the loan will affect the good credit rating they have worked hard to build.

Once you are approved for the loan, it’s time to work out the details.

Step 4: accept and sign

The repayment terms of a student loan can vary greatly between private lenders, so it’s important to thoroughly understand your needs and how the terms line up with them.

Remember the questions you asked while researching different private lenders? Refer to those when going through the loan terms. A lender is required to lay out all of the terms of the loan in writing; this is called disclosure.

Once you’ve agreed to the terms, there are two more important forms to complete:

Promissory note

This contains all of the agreed upon terms of the loan, and constitutes a written promise to repay the loan according to those terms (source). It lands somewhere between the informality of an IOU and the rigidity of a legal contract, but it is a binding promise.

Self-certification form

This form is sent to your school once you have agreed to the loan terms. It confirms several things, such as your enrollment details and expected graduation, but most importantly it confirms the cost of attendance. If your loan exceeds attendance costs, the school can lower the amount you receive. If this happens, the lender will need to generate a new disclosure to you, and you may need to sign new loan documents (source).

Step 5: disbursement

Congratulations! Your school has approved the loan, and you’ve signed all of the necessary documents. The next step doesn’t require anything of you, the student. The lender will send the money to your school’s financial office by a certain date, and the money will be applied directly to your tuition. If your loan is meant to cover two separate semesters, it will likely be disbursed on two separate dates.

Step 6: repayment

The final step is repaying the money that you’ve borrowed, and how you do this is set out in the terms of the loan. Again, some lenders have more flexibility than others when it comes to repayment.

The most important thing to remember is to pay your monthly bill on time.

Failure to do so could have seriously detrimental effects on your credit rating, and your ability to take out new loans in the future. Don’t forget that if you have a cosigner, failure to pay on time will hurt their credit as well.

Private vs. federal

As mentioned, it is likely that you will need to carry both private and federal loans, and it’s important to understand the pros and cons of both. While there are some differences, the gap is closing; new private lenders are challenging conventional practices and becoming less rigid.

Interest rates

Federal student loans typically have a fixed interest rate; whatever the rate is at the time you borrow is where it will stay over the course of the loan. Private loans can offer a fixed interest rate or a variable one that will fluctuate over time, sometimes even month to month.

While the variable interest rate can increase your monthly payments, lenders like Sofi have introduced caps, meaning the variable interest rate can only rise to a certain extent.

Repayment terms

These vary widely from lender to lender, and even different federal loans have different policies. But federal loans do have some features simply not offered by private lenders. For instance, some offer debt forgiveness if you pursue a civil service career, or tie monthly payments to your monthly income. However, the consequences of defaulting on federal loans can be quite serious, such as wage garnishing and confiscation of tax refunds (source).

Shop and compare the best rates

Shopping around can save you tens of thousands of dollars throughout the life of a student loan. SuperMoney has made it easy to review rates and terms and apply for a loan, without wasting time filling forms and scanning websites. Compare the best rates available and see what other students have to say in their consumer reviews.