How to Choose a Private Student Loan

One of the biggest questions when deciding to return to school is how to finance the tuition and other education costs. Many people opt for student loans because they are the fastest way to secure funding and allow students to fund their education with income from the job they secure after graduation. 

However, deciding which loan option is right for you can be difficult. Private student loans can be obtained through hundreds of lenders with a wide range of loan amounts, terms, and interest rates, making it feel impossible to choose the right one. 

To help with the process, learn more about private student loans, what to look out for when choosing one, and alternatives for paying for your education. 

What are Private Student Loans?

Private student loans are a type of financial aid that can be used to cover college or university costs. Unlike federal student loans, which the government funds, private student loans are offered by banks, credit unions, and other private lenders.  Private loans will have different interest rates, repayment terms, and eligibility requirements than federal student loans.

Private student loans can be used to cover the cost of tuition, room and board, books and supplies, and other educational expenses. To apply for a private student loan, borrowers typically need a good credit history and income. 

Depending on the lender, a private student loan may have a fixed or variable interest rate, meaning the interest rate may change, which could drastically affect your payment amounts. They also usually have shorter repayment terms than federal student loans, leading borrowers to make higher monthly payments on their private student loans than on their federal student loans. 

It’s important to compare all options before taking out any student loan to ensure you’re getting the loan that makes sense for your financial situation.

When to Take Out a Federal Loan Instead of a Private One?

Private and federal loans each have benefits, but there are times when taking out a federal student loan is the best option. As a general rule, you should always research your federal loan eligibility before turning to private lenders so you can determine what rates, terms, and amounts you may be eligible for.

Federal loans typically have lower interest rates, currently at 4.99% for undergraduates, that are always fixed, so they will not change for the entirety of the loan. Federal loans also don’t accrue interest while the borrower is still in school. It’s also worth mentioning that federal student loans also had a pause on interest during the COVID-19 pandemic from March 2020 until December 2022, in which loans did not accrue interest while most private ones did.

Federal loans have more flexible repayment options than private loans, such as income-driven plans that ensure your monthly payments never exceed 10-15% of your monthly income, depending on the plan you choose or are eligible for. 

Federal loan repayments don’t start until the borrower is out of school, with an additional six-month grace period intended to allow the student to secure a job. Most private student loan repayments start immediately and offer no income-based options to help with monthly payments.

Federal loans are also a better option for those with no credit or bad credit because they are geared toward young students who typically haven’t had the opportunity to build a good credit score. So if you have poor credit and can’t get or don’t want a co-signer, federal loans may be the only option. Unlike private loans, the federal interest rate is not dependent on your credit score.

What are the Benefits of Private Student Loans?

There are some benefits to opting for a private student loan over the federal option. One of the main benefits of a private school loan is the possibility of a lower interest rate. Because the federal government sets federal loan rates, they are the same for all borrowers. 

This makes it easy for those with poor credit to obtain and manage a loan, but for those with great credit, the 4.99% federal rate may be higher than what a private organization may offer. In this case, a private loan may be a better option. This can save you a significant amount of money over the life of your loan and allows you to pay it off more quickly.

Private loans also offer higher loan amounts and don’t require demonstration of financial need. For those in graduate school or attending a particularly expensive university, there might be a need for a higher loan amount than the one offered by the federal government. A private lender may be able to provide a higher amount to help cover the total cost of your tuition, depending on your credit score and possible co-signers for the loan. 

Unlike federal loans, these loans also don’t need to show financial need. Because the federal loan program is geared toward those with the most financial need, the federal government uses a student’s family’s income to determine their eligible amount. 

This loan amount may not cover all necessary educational costs, whether or not their family will contribute to the educational expenses. In these circumstances, a private loan, which will not take family income into account, may offer a better loan amount for the student.

What are the Potential Downsides to Private Loans?

Because student loans are often substantial sums, and the loan term can last for many years, it’s important to look at all sides before deciding which option to take, as it could impact your financial situation immediately and for many years. Before opting for a private student loan, consider some potential downsides.

  • Private loans typically have higher interest rates than federal loans. You could end up paying more in total interest over the life of your loan.
  • Private loans may have less flexible repayment terms than federal loans. This could make it harder for you to make monthly payments if you hit a rough financial patch.
  • You may be unable to discharge your loan in bankruptcy. This means you’ll still be on the hook for repaying your loan even if you can’t find a job after graduation.
  • Your parents may be unable to help you with private loans. Private loans don’t offer the same parental assistance options as federal loans.
  • Private loans are ineligible for certain repayment plans, such as income-driven repayment options that federal loans offer, including plans for $0 monthly payments for those with little income.
  • Private loans do not offer loan forgiveness, such as the Public Service Loan Forgiveness, which forgives the loan amount after making 120-qualifying payments of those that work for the U.S. federal government (including the military), state, local, or tribal government or a not-for-profit organization full-time.

How to Compare Private Student Loan Lenders?

When you take out any loan, shopping around for lenders is essential to get the best rate, term, and monthly payments. If you’re considering applying for a private student loan, it’s important to compare lenders to find the best deal. Here are a few factors to keep in mind when you compare private student loan lenders:

  • Interest rates: The interest rates on private student loans can vary significantly from lender to lender. It’s important to compare interest rates so that you can get the best deal possible.
  • Repayment terms: Private student loans generally have 10 years or more repayment terms. Some lenders may offer shorter repayment terms, which can help you save on interest charges but will increase your monthly payments.
  • Fees: Some private student loan lenders charge origination fees or other fees, such as early payment fees, in addition to interest. These fees can add up quickly, so it’s essential to compare them before you apply for a loan.
  • Loan limits: Private loan limits will vary greatly. Check your loan limits to ensure you are getting enough to cover your essential educational costs without taking out too much that your monthly payments will be difficult to keep up with. Compare loan amounts to ensure you aren’t overextending your finances.

How to Get the Best Interest Rate on a Private Student Loan?

If you’re planning to take out a private student loan, you’ll want to ensure you get the best interest rate possible. Here are a few tips to help you get the best deal:

  • Shop around. Compare rates from multiple lenders to see who’s offering the best deal.
  • Consider a variable-rate loan. With a variable-rate loan, your interest rate will fluctuate along with market rates. While this means your monthly payments could go up, it also means you have the potential to save money if rates go down.
  • Think about your repayment options. Some lenders offer flexible repayment options that can help you save on interest. For example, some lenders allow you to make interest-only payments while in school, which can help keep your overall loan costs down.
  • Get a co-signer. If you have a creditworthy co-signer, you may be able to qualify for a lower interest rate or higher loan amount to help cover your costs while keeping interest payments low.

What Happens If You Can’t Repay Your Private Student Loan?

Many people worry about what would happen if they can’t repay their private student loan. Private loans with three missed payments will go into default. A defaulted private loan will typically have three consequences:

  • Your lender may try to collect the debt from you directly. They may do this by contacting you by phone, mail, or even text message. If you don’t respond to their attempts to collect the debt, they may take legal action against you. This could include filing a lawsuit leading to possible wage garnishments.
  • Your lender may sell the debt to a collection agency. Collection agencies are businesses that specialize in collecting debt from people. If your lender sells your debt to a collection agency, the collection agency will then attempt to collect the debt from you. They may use some of the same methods as your lender, such as contacting you by phone or mail. However, they may also use more aggressive methods.
  • Your credit score will be damaged. This could make it challenging to get approved for a mortgage or car loan in the future. 

Can You Consolidate Your Private Student Loans with Other Debt?

If you’re struggling to repay your student loans, you may be able to explore student loan consolidation or refinancing as a way to get a lower interest rate and monthly payment. It may be possible to consolidate your private student loans with other debt, but there are a few things to keep in mind. 

Consolidating your debt will not always lower your interest rate and keep your overall amount owed the same. However, it can make your monthly payments more manageable by giving you a single monthly payment instead of multiple each month, which may make the monthly payments slightly lower. However, refinancing in this way may extend the life of the loan, making you pay more over time. 

You can refinance or consolidate a private student loan through a bank, credit union, or online lender. If approved for refinancing, this lender will buy your loan from your current lenders, and you will make your monthly payments to the new lender from now on. 

Refinancing a private loan is an excellent option for those who have trouble making monthly payments or want to research alternatives to save money on interest. 

How to Apply for a Private Student Loan

To apply for a private student loan, you’ll first need to compare lenders and choose the one that offers the best terms for you. Once you’ve selected a lender, you’ll need to complete a loan application and provide financial information, such as your income, assets, and credit report.

After your application is approved, the lender will provide you with a loan agreement outlining the loan terms, including the interest rate and repayment schedule.

Read the loan agreement carefully before signing it. Ask the lender before signing if you have any questions about the agreement. Once you’ve signed the loan agreement, the lender will provide you with the funds.

Alternatives to Private Student Loans

There are several alternatives to private student loans that borrowers should consider before taking out a loan:

  • Grants or scholarships. Free money should always be your first choice. Grants and scholarships are offered by the federal government, state and local governments, your university, your or your parent’s credit unions, and other organizations you may belong to, such as Girl Scouts or 4H.
  • Federal student loans. Federal loans often offer lower interest rates and more flexible repayment terms than private loans. Even if you don’t plan on taking out a federal loan, it’s a free way to see what you may be qualified for.
  • Work-Study programs. Offered by the federal government, Work-Study programs provide part-time jobs for undergraduate and grad students with financial need. This allows students to earn money to cover education costs. This is not a loan but is still subject to state and federal taxes. Depending on your need, you may qualify for a Work-Study program that can cover a portion of your educational costs.
  • ROTC. ROTC, or the Reserve Officers’ Training Corps, is a program offered at over 17,000 universities and colleges in the U.S. ROTC pays for an undergraduate education while you undergo training to become a military officer. Upon graduation, you will join the military branch you opted for: Army, Air Force, Navy, Marine Corps, or the National Guard, and work as an officer for a set period to fulfill your commitment, typically four years. 

Understand Private Loans with Finance is us

Private student loans can be a helpful tool for financing your education, but it’s essential to understand the terms of a private loan and other options available. 

If you’ve decided to choose a private student loan, compare offers from multiple lenders to get the best deal and be aware of any borrower benefits they offer. Remember that private loans should only be used as a last resort after you’ve exhausted all other options.

Finance is us can help you navigate the student loan process, including obtaining the best loan for you, consolidating a loan for a better interest rate, or tips on paying off a loan faster. 


Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.

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