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LAST UPDATED: December 12, 2024
Compare top rated student loan companies: 2024
Do you need to pay for college but don’t know where to start? We’ve organized a list of top student loan companies! Easily compare interest rates and choose the best private student loan for you.
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What are private student loans?
A loan is an agreement where a lender will give a borrower money if they promise to pay them back over a certain time period. To make it worthwhile to the lender, the borrower must pay interest on top of what they owe, which is calculated as a percentage of the total loan amount.
Private student loans are used to pay for education-related expenses and can be a great option to cover whatever’s leftover after taking out federal student loans. Rather than being funded by the government, private student loans are offered by a credit union, bank, or online lender.
What’s the difference between federal and private student loans?
Both federal student loans and private student loans can be used to help you pay for school. Here are the differences between these two kinds of loans:
Federal student loans
A federal student loan is an education loan funded by the government, typically through the Department of Education.
Great for students who:
Have limited income or credit history
Want an fixed interest rate that won’t go up or down
Need flexible repayment options
Private student loans
A private student loan is an education loan funded by a private lender, such as a bank, credit union, or online lender.
Great for students who:
Have a cosigner or good credit score
Want the ability to apply at anytime
Need more funding than federal loans can provide
What can private student loans be used for?
Private student loans can cover a variety of education-related expenses, including:
Do
Tuition and fees
Housing and utilities
Meals and groceries
A personal computer
Transportation to and from school
Study abroad program
School supplies
Textbooks
Childcare expenses
Don'ts
Vacation travel
Clothes
Entertainment
Expensive meals
Alcohol
New car
Investing
Business expenses
A down payment on a home
Private student loans: factors to consider
In order to find the best student loan option with the lowest interest rate and most favorable loan terms, you'll need to consider a variety of important factors while you're shopping. Here are just a few of the most important to look out for.
Eligibility requirements
Private loan lenders typically consider a variety of factors before deciding to make you a loan offer, including your income, credit score, and citizenship status. If you don't meet the minimum loan eligibility requirements, you may need a creditworthy cosigner to increase your chances of approval.
Cosigner release
Speaking of your cosigner, they'll be on the hook to repay your private student loan if you fall behind on repayments. However, lenders typically provide loan terms for cosigner release if you've kept up with your payments for long enough (the exact time period varies lender-by-lender).
Repayment options
You'll want to take into consideration any grace periods, deferment options, or forbearance options your chosen lender may offer in case you experience financial hardships or fall behind on your repayment.
Interest rates
Naturally, the interest rate of the loan is going to be a major factor in your decision-making process, and you’ll come across the terms “fixed interest rates” and “variable interest rates.” Fixed rates remain constant over the life of your loan, while variable rates can increase or decrease with the market. In either case, the lower the interest rate you can secure, the less you'll have to pay back over the life of the loan.
Your private student loan questions answered
An interest rate is a percentage of your loan value that’s added onto your total monthly repayments — this is the cost that comes with borrowing money.
The total amount of interest you owe is determined by the amount of time you take to pay off the loan and your interest rate.
Since more interest is owed with each payment, having less payments by repaying your loan sooner can lead to big savings.
Additionally, getting a low interest rate means that you will owe less interest with each monthly repayment, helping you save money over the life of the loan and pay off your debt faster.
Most private student loans will offer you the choice between a fixed- or variable-rate loan. The difference between them is:
- A fixed-rate loan has an interest rate that remains the same over the entirety of the loan. This means that your monthly payments won’t change either, leading to predictable payments.
- A variable-rate loan has an interest rate that can go up or down with the market. As a result, your monthly payments could increase, but they also have the potential to decrease.
Historically, over 90% of private student loans taken out by undergraduate students are borrowed with a cosigner — a creditworthy individual who agrees to repay the debt if you, as the primary borrower, fall behind. The reason behind this is that students usually haven’t had the time to build up their credit yet to meet lenders’ loan approval requirements.
Even if the lender doesn’t require a cosigner or you don’t need one, applying with a cosigner could improve your chances of qualifying for a private student loan at a lower rate.
You can still get a private student loan with bad credit, but maybe not on your own. If you have bad credit or no credit at all, you will most likely need to add a cosigner to qualify.
Even if you can get approved for a loan by yourself, your interest rate will likely be high if your credit score is low. One potential way to avoid this and get approved for a student loan with a lower interest rate can be to apply with a creditworthy cosigner.
While most lenders allow you to borrow up to the total cost of attendance for your school, how much you can actually borrow may vary based on the lender, your major, your credit score, and whether or not you have a cosigner.
A school's total “cost of attendance” is defined by your school and usually includes costs like: tuition and fees, room and board, transportation, school supplies, and any other education-related expenses.
Just because you might be able to borrow 100% of school-related expenses with a private student loan doesn’t mean you should. It’s always a good idea to explore other funding options like federal student loans first before turning to private student loans to cover whatever’s leftover.
Each lender has their own requirements for taking out a loan. With that being said, lenders will usually require that you:
- Plan to use the loan for education-related expenses
- Have a qualifying credit score
- Have a qualifying income and debt-to-income ratio (DTI)
- Be enrolled in an eligible school
- Be a U.S. citizen or legal resident with a Social Security number
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