If you’ve been accepted into a higher education program, you’re probably excited to get started. This is a big step, and certainly worth celebrating! Before you start, however, you’ll have to overcome a hurdle: paying for your education. Unless you have a scholarship or another way to pay, you’ll probably need student loans. Many people have to take out both federal and private student loans.
How do private loans differ from federal loans? And what does repayment look like?
What Is a Private Student Loan, and How Is It Different From a Federal Student Loan?
The government offers federal student loans, while for-profit companies offer private loans. There are several other differences between the two. Here are some important ones:
- Most private loans don’t let you pause payments while in school.
- Private loans often have higher interest rates.
- Interest on private loans may be fixed or variable.
- Private loans can’t be consolidated with a federal Direct Consolidation Loan.
- Private loans generally don’t offer income-driven repayment options.
- Private lenders usually offer forbearance, and sometimes deferment, for financial hardship, but availability and terms vary by lender.
- Private lenders usually don’t offer loan forgiveness options.
Many people wonder: Is it harder to get private student loans than federal loans? In many cases, the answer is yes. You can get federal student loans based on financial need. You don’t need a credit history or a cosigner. Private student loans typically require you to have good credit or a cosigner.
What Are the Downsides of Private Student Loans?
Private student loans have several downsides compared to federal loans. Namely, they don’t offer the same borrower protections as federal loans.
So why take out private student loans when federal loans are available? If you’ve tried to take out federal loans to fund your education, you may have already discovered that there are limits on how much you can borrow.
Because of annual and aggregate limits, many college students take out both federal and private loans to pay for school.
How Do You Get a Private Student Loan, and What Are the Requirements?
Wondering how to get a private student loan? Private student loan requirements are different from those of federal student loans. Private lenders operate much like companies that offer car or personal loans. They focus more on your ability to repay than on your need for the loan.
The exact requirements can vary from lender to lender, but most look for the following:
- Your credit score
- Proof of income
- Enrollment in an approved school (usually at least half-time)
Many students (especially those entering undergraduate programs) don’t have an established credit history or significant income. Therefore, it’s not unusual for a private lender to require a cosigner.
How Does Repayment Work for Private Student Loans?
Private student loan repayment varies by lender, but it is generally less flexible than federal student loan repayment.
Some private lenders offer in-school deferment, while others may require you to begin making payments while still in school. Once repayment begins, you must follow the terms set by your lender.
Unlike federal student loans, private lenders are not required to offer standardized hardship protections. Some may provide forbearance or other temporary relief options, but availability and terms vary by lender. As a result, your ability to pause payments during financial setbacks may be limited depending on your loan agreement.
What Are the Best Private Student Loan Options, and How Do You Compare Lenders?
Before you seek private loans, you should understand that not all of them are created equal. Some may offer better interest rates and loan terms than others.
Not sure how to determine which lender is the best option for you? Here are a few key factors to evaluate when comparing private lenders:
- What’s the interest rate? Is it fixed or variable?
- Is a cosigner required?
- Are there application or origination fees?
- Is there a prepayment fee?
- How long is the repayment term? Can it be extended if needed?
- In what cases does the lender allow deferment or forbearance?
- Will you have to repay the loan while in school?
- Once you graduate, will you have to start paying immediately?
Researching and comparing lenders can feel overwhelming. Fortunately, there are free online tools that can help. For example, ELMSelect lets you look at eligibility requirements, interest rates, and other factors side-by-side in just a few clicks.
Learn About Private Loans Before You Borrow
For some students, taking out private loans is unavoidable. But before you borrow, you should do your homework. When you go beyond learning the private student loan definition and start understanding what sets private loans apart, you’ll be more likely to make smart financial decisions.
