How Private Student Loans Work

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In this article, we explain how private student loans work. Student loans are a necessity for most college students. Tuition, living expenses, and other costs can add up, and since most students spend most of their time in class, getting a job isn’t always an option.

Enter private student loans. These are a form of financial aid that students can use to finance their education and living expenses.

These are debs that are provided by banks, credit unions, and alternative lenders as opposed to the federal government.


How Private Student Loans Work - Main Types

There are two main types to choose from: variable and fixed-interest rate.


Fixed-rate means that your interest rate will stay the same for the entire term. Your payment will remain the same from month to month, making it easier to plan your spending around your payments.


Variable-rates, on the other hand, carry interest rates that fluctuate over time. Generally, these start out with lower interest rates which increase as you get closer to the end of your term. As a result, it can be difficult to predict your future payments.

Generally speaking, fixed-rates are better for most people as they are more predictable. Variable-rates may be preferable if you expect to be able to pay off the balance early so you can take advantage of low introductory interest rates.

Pros & Cons of Private Student Loans

There are several advantages offered by private lenders as well as a few downsides to consider. Let’s take a quick look at how private student loans work and the pros & cons.

Pros of Private Student Loans

The pros include:

  • Can provide additional funding on top of federal student loans
  • Fast application processes
  • Offer funding for half-time students
  • Can have lower interest rates than federal options
  • Can be used for nearly any education or living expenses while you are enrolled in college

Cons of Private Student Loans

Cons for these products include:

  • May not offer payment deferral
  • Do not qualify for federal debt forgiveness
  • Not subsidized
  • Have fewer repayment options than federal options

While they do have a few disadvantages, the pros may outweigh the cons, depending on your financial needs.

How Much Do Private Student Loans Cost?

While the total cost depends on how much you need to borrow, there are a few factors that can help you determine how much one would cost.

Borrowing Limits

Borrowing limits vary from lender to lender.

Many lenders base borrowing limits on your school’s total cost of attendance. This includes tuition as well as living expenses, books, and other costs.

In general, you should expect to be able to borrow a maximum of between $100,000 to $200,000.

You may also be able to borrow more if you plan to pursue a graduate degree.

Interest Rate

Interest rates depend entirely on the lender that you choose and your current financial status.

That being said, you can expect to see interest rates to fall somewhere in the range of 4% to 13%.



It’s also important to be aware of what fees your lender may charge you.

Common fees include:

  • Application fees
  • Late-payment fees
  • Origination fees
  • Prepayment fees
  • And more

Every lender has its own terms and conditions, so be sure to review your offer carefully before signing anything as fees can add up if you’re not careful.


Your term is another factor that will be determined by your lender. However, you can expect the term to be between five and 15 years. Of course, the longer the length of the contract, the more you’ll pay in interest. So, if you can afford the higher monthly payments, a shorter term will help you save more money overall.


To qualify, you’ll need to understand how private student loans work and meet a few requirements, including:

  • You must be enrolled full-time or half-time in a degree program
  • You should aim to have a credit score of at least 650, though this requirement varies
  • You may also need a co-signer

You may also be asked to provide documents like pay stubs, tax returns, or bank statements in order to prove you earn enough money to make your loan payments.

Since they are not federally regulated, you’ll have to check with your lender for specific requirements.

Where to Get Private Student Loans

There is no shortage of lenders to choose from, some of the most reputable include:

These are a few of the most popular private lenders on the market, but be sure to do your own research to find the lender that meets your needs.

Tips for Shopping

Ready to start looking?

Make sure to understand how private student loans work and keep these tips in mind to make shopping for the right one as easy as possible.

Research & Compare

There is no one right option when it comes to choosing a lender. It’s important to consider what your needs are so that you can find the lender that meets them.

For example, some are only available for undergraduate students while others are intended for graduate students.

You may also be interested in avoiding certain fees, like a prepayment fee, for example.

As a general rule of thumb, try to find at least three to four lenders that meet your needs, then compare rates and terms between them to find the best option for you.

Prepare Your Documents

To apply, you’ll likely need the following documents:

  • Personal information, including phone number, address, and email address
  • Personal identification
  • Bank statements
  • Social Security Number
  • Employment history
  • Proof of financial need
  • Cost of attendance for your school
  • Expected graduation date
  • Degree program
  • And more

Check with your lender to see if there are any other documents you need to complete your application.

By gathering these documents in advance, you can complete the application process as quickly and easily as possible.


After gathering the necessary documents, it’s time to apply.

Take your time to fill out the application accurately in order to avoid any complications. Make sure to stay in contact with your lender in case you need to submit any additional documents after completing your application.

If you are approved, be sure to carefully review your offer to ensure you are happy with the terms and interest rate. If you are, you can sign your agreement and receive your funding.