What to Consider When Shopping for Private Student Loans

by Kayla Soyer-Stein

September 21, 2021

What to Consider When Shopping for Private Student Loans

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Of undergraduates aged 15-23, 40.5% use federal student loans to help pay for their education.

In addition to federal loans, some students pay for their education with private student loans. Private loans come from banks, credit unions, or state-based organizations that set their own terms and conditions. They usually do not include the same benefits as federal loans, such as low interest rates and flexible repayment options.

This page will cover the different types of loans available to students, and provide guidance on how to choose student loans. For even more information, see our in-depth student loan guidebook.

Private Student Loan Options

Banks and financial institutions offer private loans to students based on their credit profiles. Types of private student loans include degree-specific loans, international student loans, and state-specific loans.

Degree-specific loans include loans for medical, law, or business school. International student loans can benefit international learners, who might experience difficulty applying for other private loans. State-specific loans can benefit students attending college within a certain state. Sometimes they can also benefit residents of that state who attend college in a different state.

Comparison websites like Edvisors and SimpleTuition can guide students on how to choose student loans from private lenders. Common private student loan lenders include Sallie Mae, Ascent, College Ave, Discover, Earnest, and SoFi.

How Do Federal Loans and Private Loans Compare?

All loans require repayment, with interest. However, federal and private loans differ in important ways, and students should understand these differences. Federal loans come from the federal government, while private loans come from non-government institutions. In general, private loans usually cost more than federal loans and come with fewer benefits.

The chart below compares key areas for both loan types to help with how to choose student loans.

Federal Student Loans

Interest Rates
Borrowers enjoy fixed interest rates for the duration of the loan, often lower than private loan interest rates.
Fees
Federal student loans typically come with origination fees of about 1% of the amount of the loan. This means that students receive slightly less money than they borrow. However, they must repay the full amount that they borrowed.
Repayment Plans
Federal loans offer different kinds of repayment plans, including standard, graduated, extended, and income-driven repayment plans.
When Payment Is Due
Payment becomes due when students graduate, leave school, or drop to less than half-time enrollment.
Postponing Payment
Students with short-term financial difficulties can sometimes stop their federal loan payments temporarily. Additionally, some students with federal loans can postpone payment through loan forgiveness programs.

Private Student Loans

Interest Rates
Interest rates can vary or remain fixed, depending on the student's credit score and the loan length. Variable interest rates can increase in the middle of the loan.
Fees
Private student loans typically do not come with origination fees. However, private lenders might charge an application fee. They may also charge fees of about 5% for late payments.
Repayment Plans
Repayment plans vary by lender, and each lender might only offer one type of repayment plan.
When Payment Is Due
Students usually begin repaying private loans while still in school.
Postponing Payment
Private loans do not usually offer loan forgiveness programs.

How to Choose a Private Student Loan

Combining private loans with other forms of financial aid can help some students afford college. Private lenders set their own rates and terms. Students should always compare lenders before choosing private student loans.

Below, students will find just a few tips on how to choose student loans.

The interest rates of private loans depend on the borrower's credit score. In general, higher credit scores mean lower interest rates.

Private loans may offer variable or fixed interest rates. Fixed interest rates stay the same for the duration of the loan. Variable interest rates can either increase or decrease depending on changing market interest rates.

Because most students lack credit history, private lenders typically require creditworthy individuals to serve as co-signers. Co-signers legally agree to repay the loan in the event that the student cannot.

Income-share agreements, unlike most other private student loans, do not require co-signers.

When comparing multiple private lenders, students should consider many factors. These include interest rates, co-signer requirements, fees, and repayment plans. Students should also consider their own needs and academic interests when comparing private student loans.

Repayment plans fall into two categories: traditional plans and income-driven plans. With traditional plans, students repay their loan in fixed monthly payments. With income-driven plans, students repay their loan in monthly payments of 10-20% of their income.

Traditional plans often let students pay off their loans faster, with less interest. Income-driven plans, however, can allow for lower monthly payments.

How to Decide How Much Money to Borrow In Student Loans

Even if lenders will loan more, students should borrow only the money they need for their education. If possible, students' total student debt should not go over their expected annual starting salary upon graduation.

The steps below can help students decide how to choose student loan amounts.

Besides tuition, students need to think about housing, food, transportation, and textbook costs. Students should total these expenses and subtract any work earnings, savings, or other financial aid sources. Then they should borrow just enough in student loans to cover the remaining cost of attending college.

Once students use all free money, such as grants or scholarships, they should look into federal loans. Federal loans typically cost less than private loans. To apply for federal loans, students must complete the Free Application for Federal Student Aid, or FAFSA.

Only after using all free money and federal loans should students consider getting private loans. Students should only ask to borrow as much as they need to cover college costs. They should never borrow more than they can expect to repay.

When calculating how much money to borrow, students should consider how they will manage their student loan debt after graduation. They should factor in their expected starting salary when deciding between a traditional or income-driven repayment plan.

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