The Difference Between Private and Federal Student Loans
Federal student loans are funded by the federal government. The terms and conditions of the loan are set by law. They may offer benefits that aren’t available with private student loans. The interest rate on federal student loans is typically fixed, meaning the rate stays the same for the life of the loan. Some loans may be subsidized—the government pays the interest while you’re in school. Except for PLUS loans (parent loans for students), federal student loans don’t require a credit check or a co-signer. If you work in public service after graduation, your loans may be eligible for forgiveness. Private student loans are funded by lenders, including banks, credit unions, state agencies, and schools. The lender sets the terms and conditions, so interest rates, repayment terms, and maximum loan amounts may differ from one lender to another. Credit requirements are more common with private student loans, and a co-signer may be required if you don’t meet the credit qualifications.
When To Consider Private Loans
Because interest rates are higher and repayment options are limited, private student loans should only be considered after you’ve exhausted your federal loan options. If you’ve already maxed out your federal student loans for the year and still need help paying for education expenses, private student loans can help you cover the gap.
Private Loan Qualification Requirements
Qualifying for a private student loan is a lot like qualifying for other loans. Because the loan is intended to pay for college expenses, lenders have an additional requirement to confirm that applicants are enrolled in college. Private loan qualification criteria may include:
Your citizenship status (some lenders require you to be a legal U.S. citizen or legal resident over age 16)Your credit score (and your co-signer’s credit score if you’re applying with one)Your incomeYour school enrollment status
Having an established credit history is one of the most important steps to qualifying for a private student loan. If you’re applying for a loan and you don’t have a credit score—or your score is low—you may need a co-signer who does meet the qualifications.
How To Apply for Private Loans
Private student loans are granted based on your credit, so the lender will take a look at your borrowing history to determine whether you qualify. Comparing lenders can help you narrow your options to the one that fits you best.
Compare Your Options
There are a number of lenders that offer private loans. When you’re comparing loans, consider the interest rate, loan term, borrowing limits, co-signer requirements, and repayment options. Whether you can get in-school deferment is also important because it means you won’t have to make payments while you’re enrolled. To get an estimate of your terms, look for lenders who allow you to prequalify with no impact to your credit. Look for student loans online, either directly with a bank or financial institution, or through a loan marketplace that matches you with several different lenders. Your school’s financial-aid office may have a list of lenders that students typically use. Finally, other students or parents may be able to give you some lender recommendations.
Gather Materials and Information
Before you apply, gather your financial information and personal identifying documents. Be prepared to provide your:
Social Security numberPermanent address or temporary school addressSchool information, including your enrollment status and degreeEmployment informationFinancial information, including income, monthly mortgage or rent payments, etc.Loan amount requested, as well as info on financial aid you expect to receive
Depending on the lender, you may need to provide a copy of a government-issued ID to verify your identity, or your recent pay stub to confirm your income. It’s a good idea to check your credit score before you apply so you know where you stand. Your credit score will impact whether you qualify for the loan or not, as well as the interest rate and amount you qualify for. A low credit score may limit your loan options, or it may mean you need to apply with a co-signer.
Fill Out Your Application
The application may only take a few minutes if you have all the requested information. If you’re completing your application online, look for an asterisk (*) indicating the required fields.
Wait for Your Results
You may be able to receive a decision in as little as three minutes. The decision could be delayed by a few days if you need to send or upload documents.
Accept Your Funding
Once your loan is approved, the next step is to review and accept the offer, then electronically sign documents that state your loan terms. The lender may require the school to certify the loan amount—which can take three to five weeks—before it can be disbursed. Some lenders disburse the loan directly to your school based on the school’s disbursement date, sometimes with one disbursement each semester. If there are funds left after college costs have been paid, you may receive a refund of the additional funds. You can return the additional funds to lower your repayment costs or you can use the funds to cover other education expenses.
The Bottom Line
It’s not uncommon to rely on multiple funding sources to pay for your college education. Private student loans can help you cover education costs that exceed financial aid, federal student loans, and your out-of-pocket contributions. You can typically borrow up to your annual education costs and optionally receive a refund of any loan funds that exceed your college costs. You can search and compare private lenders online, then apply once you’ve narrowed down your selection. Having a co-signer can help you qualify for better loan terms, but with established credit history and sufficient income, you may be able to apply on your own.
