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When researching student loans, you’ll discover that there are two different types: private and federal. But what is a private student loan exactly, and how does it differ from a federal one?
While both loans can help you pay for college, they have key differences you should be aware of before you borrow. To get a grip on what you should know before you take out a private loan for school, let’s answer the following questions:
What is a private student loan?
Private student loans are offered by private lenders, such as your local bank, a national bank, an online lender or a credit union. Federal student loans, on the other hand, are offered through the U.S. Department of Education.
Private student loans can be used to cover your higher education costs, whether you’re in an undergraduate or graduate program or the parent of a student. There are also private student loans that cover other costs.
If you have to study for the bar as a law student or complete your residency after medical school, for example, there are private student loans to help you afford these obligations.
Since you need a good credit score and proof of income to get a private student loan, you’ll likely have the most luck applying with a cosigner, such as a parent.
Your cosigner will be jointly responsible for paying back the loan, so you both need to have a serious discussion about risks and plans for repayment before taking on debt together.
What’s the difference between a federal and private student loan?
Each private lender sets its own qualifications for a loan. But the government sets the rules for federal student loans. Here are some key ways private and federal student loans differ:
|Private student loans||Federal student loans|
|Type of interest rate||Fixed or variable||Fixed|
|Interest rate||Rates vary||Direct unsubsidized loans have a rate of 2.75% for undergraduates and 4.3% for graduates for loans disbursed after 7/1/20 and before 7/1/21. PLUS loans disbursed after 7/1/20 and before 7/1/21 have a rate of 5.3%.|
|Loan origination fee||Varies, but some lenders don’t charge a fee||Direct subsidized and unsubsidized loans disbursed on or after 10/1/20 and before 10/1/21 have an origination fee of 1.057%. PLUS loans disbursed on or after 10/1/20 and before 10/1/21 have an origination fee of 4.228%.|
|Credit check required?||Yes||No for direct loans. Graduate students and parents applying for PLUS loans can’t have an “adverse credit history.”|
|Repayment terms||Typically a choice of 5 to 20 years||Loans go on the standard 10-year repayment plan. You can also apply for an alternative plan, such as income-driven repayment, extended repayment or graduated repayment.|
|Eligible for Public Service Loan Forgiveness?||No||Yes|
- Private student loans can have fixed or variable interest rates. Rates vary from lender to lender. Federal loans, however, all come with fixed interest rates.
- Your credit score and income will determine your interest rate when you apply for a private student loan. You might need a cosigner if you don’t qualify on your own. For federal student loans, all qualified applicants receive the same interest rate, regardless of their credit score or income.
- Repayment terms on private loans vary from lender to lender; most give you between five and 20 years to repay your loans. Federal student loans, on the other hand, come with various repayment options. For example, you can choose from the 10-year standard repayment plan or income-driven repayment (IDR) plans that set your monthly payments based on your income.
- Most private lenders do not offer loan forgiveness. But federal student loans could be forgiven in certain cases. For example, if you work in public service or make regular payments under an IDR plan, a portion of your loans could be forgiven after 10 or more years.
For more details about the differences between private and federal student loans, check out our guide.
What are the top pros and cons of private student loans?
Federal loans offer more protections to borrowers than private loans. But this doesn’t mean private loans don’t play an important role in funding educational costs.
Pro: You can borrow as much as you need
Private student loans have one big advantage: You can typically borrow as much as the school-certified cost of attendance.
Eligibility for federal student aid, on the other hand, is limited based on annual and lifetime limits set by the government. Your school also determines how much financial aid you receive, and the amount you’re awarded could be lower than the maximum federal limits.
If you aren’t offered enough federal aid to cover the cost of the school you want to attend, private loans might be the next-best option.
Con: You won’t get the same protections as you would on federal loans
The big disadvantage of private student loans, however, is that they lack many of the protections that are offered to federal student loan borrowers. These protections include repayment plans based on your income and loan forgiveness for qualifying public service work.
It can also be a little harder to pick the right private lender. Since loan terms aren’t standardized among private student loans, you need to shop around and compare loan terms. Though private student loans might require more research, it’s easy to compare options since you can apply for them online.
What’s the interest rate on private loans?
When shopping for private lenders, the student loan interest rate you’re offered is a key point to consider. A higher interest rate means you pay more for borrowing money.
Interest rates vary based on different factors, including which lender you choose, whether you opt for a fixed- or variable-rate loan, and what your credit score is.
A fixed rate means your loan payments won’t change over time. A variable rate means your interest costs could increase or decrease over the life of your loan.
When you compare lenders and see the interest rates you’re offered, use our student loan comparison calculator. It could help you compare loan offers.
How can you apply for a private loan?
Now that you can answer the key question of “What is a private student loan?” you might decide you’re ready to apply for one.
Applying is easy; most lenders allow you to submit applications online. You must provide information on your credit, income and assets when applying. If you have a cosigner, you’ll need to submit their information, too.
You’ll usually get a decision within a few minutes, but the lender will need to work with your school to verify loan amounts and arrange disbursal. Money from private loans will be sent to your school to cover tuition costs, and any leftover funds will be distributed to you to help pay for books, housing or other related school costs.
You’ll need to decide if you want to start making loan payments right away or if you plan to wait until graduation to begin repayment. Hopefully, you’ve borrowed only what you needed. Head here to learn how to avoid taking on too much student loan debt.
Rebecca Safier contributed to this article.