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A Guide to Private Student Loans

November 12, 2018 · 6 minute read

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A 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, so you can take out the best private student loans for your situation.

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 qualify for them by filling out a FAFSA (Free Application for Federal Student Aid) form which allows the government to determine your financial need in relation to the school you’ll be attending as well as by looking at your family’s means.

In contrast, private student loans are student loans that are offered by banks or private lenders to help you pay for school. To qualify for them you have to fill out a loan application like 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 will depend primarily on your credit score and income and the credit score and income of your co-signer (should you need or opt to have one).

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.

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 your 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 can take up to two months for the private loans to clear your account.

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 grants, work study, or part-time jobs are factored in.

The maximum amount that you can borrow from programs offered 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 undergrads can borrow is $5,500 for the year; The most graduate or professional students can borrow is $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 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 also have more choices in regard to term lengths. Many allow you to choose between five, 10, and 20-year term lengths on your loans.

Unlike other types of loans, private student loans do not often charge origination fees or prepayment fees, though you should check the fine print on your award to make sure.

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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 co-signer. After all, most high school and college students don’t make enough income or have a good enough credit score to qualify for private student loans on their own.

A 2012 study found that 90% of private student loans given out have a co-signer.

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

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

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. Also, while private loans may offer more term length options, federal student loans offer different types of payment programs and things like loan forgiveness that aren’t available with private student loans.

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

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

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 loans and need a little bit in private student loans to top you off. Or maybe you experience an emergency mid-way through the term and need more money than you expected.

Whatever the reason, it’s important that you look into your options to find the best private student loans for you. There are a number of different kinds of companies that offer low interest rates and flexible term lengths to choose from. Look for loans that don’t have prepayment or origination fees and offer extra services like co-signer release and deferment.

How to Refinance Your Private Student Loans

If you already have private student loans, refinancing could be a good option for you. Refinancing student loan debt could allow you to shorten your term length, lower the interest rate on your loans, or lower your monthly payment.

Refinancing may also allow you to consolidate private and federal student loans. Just remember, if you choose to consolidate, you would no longer receive the benefits of federal student loans, such as deferment or forbearance, or income-driven repayment plans.

Whether you are looking to borrow for school or refinance your student loans, SoFi can help.

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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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. View payment examples. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. 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.

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