Guide to Private Student Loans

By Kayla McCormack · July 18, 2023 · 11 minute read

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Guide to Private Student Loans

College is expensive. That means that even if you saved up your pennies since you were five, are currently working two part-time jobs, with a clutch of scholarships in tow, you might still need a little extra student loan cash to help you pay for your degree.

There are a number of ways to finance your college education, but the two most common options are federal and private student loans. Federal student loans are fairly straightforward, but private loans can get a bit murky.

After all, there are a lot of options when it comes to things like private student loan interest rates, term lengths, and approval criteria. It can be hard to understand what makes one lender or type of private student loan better than another.

That’s why it’s important to learn as much as you can about private student loans so that you’re better able to decide if they’re right for you, and find the private student loans that work best for your situation.

Recommended: Types of Federal Student Loans

What are Private Student Loans?

Often when people talk about student loans, they’re referring to federal student loans which are given out by the government and have a common set of criteria around things like interest rates, repayment plans, and forgiveness programs.

When it comes to federal student loans, you apply for them by filling out the FAFSA® (Free Application for Federal Student Aid) form which allows the government to determine your financial need in relation to your family’s income and the school you’ll be attending.

In contrast, private student loans are student loans that are offered by banks or private lenders to help people pay for school. To apply for them, you have to fill out a loan application as you would for any other loan, like a mortgage or an auto loan.

How much you can borrow won’t just depend on the costs of your degree, but typically depends primarily on personal financial factors like your credit score and income and the credit score and income of your cosigner (should you need or opt to have one).

How Do Private Student Loans Work

Private student lenders set their own terms in regard to term lengths, private student loan interest rates, repayment plans, and underwriting criteria. For that reason, one private student loan lender can offer options that are very different from another private student loan lender. That’s why it’s so important to seek out private student loans that are right for you — there can be a huge difference between one lender and another.

To apply for a private student loan, potential borrowers will file an application directly with their lender of choice. Based on the information submitted, the lender will determine whether or not the applicant is approved for the loan, and the rates and terms for which the applicant qualifies.

Recommended: How Do Student Loans Work? Guide to Student Loans

The Benefits of Private Student Loans

There are a lot of benefits when it comes to private student loans. For many students, they can mean the difference between paying tuition and fees in full or not being able to. One key benefit of private student loans is that you can apply for them at any time of the year — unlike federal student loans.

For that reason, they can potentially help you with those end-of-term funding shortfalls. Just be sure to plan ahead since it may take a while for the private loans to clear your account depending on the lender.

Private student loans are often used to make up the difference between what a student is able to borrow in federal student loans and their remaining need after things like scholarships, federal or state grants, work-study, or part-time jobs are factored in.

The maximum amount that you can borrow through federal government student loan programs depends on things such as whether you’re an undergraduate or a graduate or professional student and whether you’re a dependent or an independent student.

With federal student loans, the maximum amount first-year dependent undergraduates can borrow in subsidized and unsubsidized student loans is $5,500 for the year. Graduate or professional students can borrow up to $20,500 per year.

The lifetime maximum for a dependent undergrad is $31,000, and the lifetime cap for graduate students is $138,500 in federal student loans, including undergraduate study. When students need more than these caps, they often turn to private loans.

Another benefit of private student loans is that you have more control over things like private student loan interest rates. There are private student loans that offer you the option of either fixed or variable interest rates.

Private student loans may also have more choices in regard to loan terms. Many allow you to choose between 5-, 10-, and 20-year term lengths on your loans.

Some private student loans do not charge origination fees, though you should check the fine print on your award to make sure.

Private student loans can even be used to pay off an outstanding tuition balance. Each lender determines how far in the past a loan can be used to pay an overdue balance, but many will allow loans to cover past-due balances that are 6-12 months outstanding. Also, keep in mind that you can apply for a private student loan at any time, and paying before the bill is due is preferable so you don’t have any interruptions in enrollment or class scheduling.

When we say no fees we mean it.
No origination fees, late fees, & insufficient fund
fees when you take out a student loan with SoFi.

The Downsides of Private Student Loans

Despite the fact that private student loans could be the difference between going to your first-choice school and having to settle for your safety school, there are some downsides.

One big downside is that they often require a cosigner. After all, most high school and college students don’t make enough income or have a strong credit history (among other personal financial factors that can take years to build) to qualify for private student loans on their own.

According to the MeasureOne Private Student Loan Report, 90.78% of undergraduate private student loans given out for the academic year of 2022-2023 have a cosigner. Plus, 65.88% of graduate private student loans are cosigned.

The good news is that some private student loans allow for something called “cosigner release.” That means that after you make a certain number of on-time payments, you can apply to have the cosigner removed from the loan.

Another change in the industry is that more lenders are shifting their lending criteria away from simply looking at things like student’s income and credit score to also looking at things like your grades and income potential. That means that hopefully more students may be able to qualify for private student loans without having to get a cosigner.

(Although, we should note here that federal student loans for undergraduates don’t require cosigners at all, and don’t take a student’s income or credit history into account.)

Since private student loan interest rates are set based in part on how big of a credit risk applicants represent, you might also find yourself paying more than you would for federal student loans.

Federal student loans offer different types of income-driven repayment programs and things like loan forgiveness for public service employment and deferment protections that aren’t available with private student loans.

For example, you could apply for an income-driven repayment plan with federal student loans that, if you qualified, would allow you to pay just 10% to 20% of your income toward your student loans and then could forgive those loans after 20 to 25 years. In contrast, when you lock in your term length on your private loans, you can’t typically change your repayment term unless you refinance your student loans.

Other people express concern that private student loans lead students to borrow more than they will be able to afford to repay or to borrow amounts that will make repayment much more difficult. Responsible borrowing is critically important, especially when it comes to student loan debt, and only you and your family will know what’s right for you.

Another downside of private student loans is that they are generally not dischargeable in bankruptcy unless the borrower files an adversary complaint and meets an undue hardship test. This is unlike other types of unsecured consumer loans, like lines of credit or credit cards.

Recommended: Can You Get A Student Loan With No Credit History?

Should You Consider Private Student Loans?

When it comes to whether or not to take out private student loans, what matters is what’s right for you. Maybe you weren’t able to qualify for enough funding in the form of federal student aid and need a little bit in private student loans to top you off. Or maybe you experience an emergency midway through the term and need more money than you expected.

Whatever the reason, it’s important that you look into your options to find a private student loan that works for you. There are a number of different kinds of companies that offer competitive interest rates and flexible term lengths to choose from. You could also look for loans that don’t have origination fees and offer extra services like cosigner release and deferment.

Federal vs Private Student Loans

There are a few major distinctions when comparing federal vs. private student loans. Importantly, federal student loans are made by the government and are subject to a specified set of rules and regulations. Private lenders are not subject to the same requirements. Here’s an overview of the important differences between federal and private student loans.

The Application Process

Federal student loans are awarded as a part of a student’s financial aid package. In order to apply for federal student loans, students must fill out the FAFSA® each year.

To apply for private student loans, students will need to fill out an application directly with their preferred lender. The application requirements may vary depending on the lender.

Interest Rates

For the 2023-2024 school year, the interest rate on Direct Subsidized or Unsubsidized loans for undergraduates is 5.50%, the rate on Direct Unsubsidized loans for graduate and professional students is 7.05%, and the rate on Direct PLUS loans for graduate students, professional students, and parents is 8.05%. The interest rates on federal student loans are fixed and are set annually by Congress.

The interest rates on private student loans may be fixed or variable and are determined by the lender based on factors included in the application, such as the borrower’s credit history.

Recommended: A Guide to Student Loan Interest Rates for the 2023 School Year

Repayment Plans

Borrowers with federal student loans can select from the federal repayment plans , including income-driven repayment plans.

Repayment plans are set by the individual lender. Review the terms and conditions directly with the lender.

Grace Period

Most federal student loans have a six-month grace period after a student graduates or drops below part-time enrollment. During this time, borrowers are not required to make payments on their loan, but depending on the type of loan they have, the loan may accrue interest during the grace period.

Private lenders may offer a grace period, while others may require payments as soon as the loan is paid out (or disbursed). Again, review the loan’s terms and conditions closely before borrowing.

Options for Deferment or Forbearance

Federal student loan borrowers can apply for deferment or forbearance if they encounter financial difficulties while they are repaying their loans. These options allow borrowers to pause their loan payments. Note that interest may continue to accrue during periods of deferment or forbearance, depending on the type of federal loan the borrower holds.

Some private lenders may offer options for borrowers who are facing financial difficulties, however, this will vary by lender. For example, SoFi has unemployment protection, which allows qualifying borrowers who have lost their job through no fault of their own, to modify payments on their student loans.

Recommended: What is Student Loan Forbearance?

Loan Forgiveness

Borrowers with federal student loans might be able to pursue loan forgiveness through federal programs such as Public Service Loan Forgiveness or Teacher Loan Forgiveness.

Private student loans are not eligible for federal loan forgiveness programs.

How to Apply for Private Student Loans

To apply for a private student loan, you’ll have to file an application directly with the lender of your choice. Some schools may provide a preferred lender list, but you aren’t necessarily required to borrow from a lender on this list.

If you’re interested in applying for a private student loan, it’s generally worth shopping around at a few different lenders so you can get a sense of the terms, conditions, and interest rates you may qualify for. Lenders will often allow borrowers to get a quote by filling out a pre-qualification application. This generally involves a soft credit inquiry, which won’t impact the applicant’s credit score.*

The application process may vary by lender, but you’ll generally need to provide basic financial and personal information. Depending on your personal financial circumstances, you may consider applying with a cosigner which could potentially help you qualify for more competitive terms.

When evaluating a private lender, consider factors like the interest rate you may qualify for, the repayment plans available, and any fees.

Applying for Private Student Loans with SoFi

If you have exhausted your federal loan options and still need to cover tuition fees, private student loans with SoFi may be a great option for you.

SoFi offers competitive rate private student loans with flexible repayment options. There are absolutely no fees (no origination fees, no late fees, and no insufficient fund fees). Plus, it only takes minutes to check your rate.

SoFi Private Student Loans can also be used to pay off an outstanding tuition balance. As long as you are enrolled the next semester or have recently graduated, you may apply a SoFi Private Student Loan to a past-due balance up to 12 months after term.

If you are looking to borrow for school, SoFi can help.

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*Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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