College costs are overwhelming for a lot of families. So students turn to student loans to cover them. Most students, following expert recommendations, start with federal student loans, but those aren’t always enough to cover costs.
When federal student loans don’t cut it, you can turn to private student loan lenders to fill in the gap.
Unlike federal student loans, private student loans offer a variety of options for interest rates, loan amounts and terms that could make picking one daunting. So we’ve pulled together a list of some of the best student loans available to make it easier for you to compare and vet your options.
Keep reading below the table for more details on every lender, plus all the information you need to find the college funding plan that’s right for you and your family.
Types of Student Loans
The first thing you need to know before applying for any student loans is the difference between federal and private student loans. These two types of loans are treated differently and offer significantly different options for repayment and forgiveness down the line, so know what you’re signing up for before you borrow.
Federal Student Loans
Federal student loans are backed by the U.S. government and make up the vast majority of student loans borrowed every year in the country.
Application: You apply for federal loans along with other types of federal student aid for college through the Free Application for Federal Student Aid, a form you fill out every year to demonstrate your family’s financial situation. The U.S. Department of Education (ED) approves basic undergraduate loans and grants based on financial need, not creditworthiness, so students can apply for federal financial aid without a cosigner.
Types of loans: The government makes four types of student loans: Direct Subsidized, Direct Unsubsidized, Direct PLUS for parents or graduate students, and Federal Perkins Loans for students with exceptional financial need. It also awards grants and work study awards based on financial need. PLUS loans are granted based on creditworthiness, but might still be easier to get than some private loans.
Interest rates: Federal student loan interest rates are standard and not based on a borrower’s credit history. Congress sets them each year for loans disbursed that year, and you keep that rate for the life of your loan. For example, the interest rate for 2021 was 3.73% for Direct undergraduate loans, 5.28% for graduate student loans and 6.28% for PLUS loans.
Repayment plans: The required repayment for federal student loans starts six months after leaving school (or going less than half time), and the standard repayment plan splits monthly payments evenly over 10 years. Subsidized loans don’t accrue interest while you’re in school, while unsubsidized loans do.
Federal student loans are originated and serviced by private institutions, but they’re backed by a guarantee from the federal government, so ED sets repayment terms. You can opt into a graduated payment plan or income-driven repayment, both which would extend your time to repay and could give you a more affordable monthly payment (as little as $0).
Only federal loans are eligible for forgiveness under programs like Public Service Loan Forgiveness and for national forbearance periods like we’ve seen during the pandemic. The pause on loan payback has been extended six times since the start of the pandemic.
Refinancing options: Even though you receive one lump payment (if you get a refund) each semester, you might have multiple student loans to your name. You can combine them with a Direct Consolidation Loan, a student loan consolidation option creates one balance and one monthly payment, and sets the interest rate at the average of all the loans. This isn’t a money-saving step, but could make repayment simpler.
You can also refinance federal student loans using a private refinancing option, which could save you money if you have strong credit and can keep up with payments. This would pay off your federal loan balances and replace them with a private loan. It removes the repayment and forgiveness options that come with federal loans.
Private Student Loans
Private student loans are consumer loans made by private banks, credit unions and financial institutions. They’re treated differently from other types of private loans, but don’t come with as much flexibility as federal loans.
Application: You apply for private student loans directly with the lender or servicer providing the loan. Lenders approve loans based on creditworthiness, just like other credit products, so you have to have a strong credit history or apply with a creditworthy cosigner to be approved. Most (but not all) lenders include an option to release the cosigner after a few years of steady payments.
Types of loans: Private student loan lenders typically offer student loans for undergraduate students, graduate students and professional degrees. Some also offer loans for career training or alternative education like bootcamps. The loans all offer the same basic terms, but interest rates and loan amounts usually vary based on the degree covered.
Interest rates: Private student loan interest rates are set based on creditworthiness and can range from less than 1% to 12% or more depending on the prime rate. Fixed rates are set when you take out a loan and stay the same for the life of the loan, while variable interest rates fluctuate up and down when the Fed adjusts the prime rate.
Repayment plans: Private lenders don’t offer the same amount of protection in repayment as the federal government, but they usually offer a variety of repayment options so you can choose a plan that helps you save money without being overwhelmed by payments. You usually get to choose whether to pay off interest and/or principal while in school, or defer all payments until six months or more after school.
Many private lenders offer forbearance options of a few months at a time, so you can pause payments due to financial hardship without defaulting on your loan. They don’t, however, offer income-driven repayment, so your monthly payment is unaffected by your ability to pay it.
Private student loans aren’t eligible for forgiveness under federal plans, but you might be able to discharge them in bankruptcy under limited circumstances.
Refinancing options: If your financial situation improves, you can apply to refinance your student loans with the same or a different private lender. This pays off your existing loans and replaces them with a new loan with better terms, like a lower interest rate or lower monthly payments.
Should You Take out a Federal or Private Student Loan?
Nearly every expert will tell you to use private student loans as your last resort to pay for school. First exhaust free funding, like grants, scholarships and work study. Then take on federal student loans. Then, if your costs aren’t covered, take out private student loans to fill the gap.
That’s because private loans are the riskiest of all those options.
Federal student loans may be subsidized to save on interest, and they come with flexible repayment plans that offer relief when your income is low. And they’re eligible for forgiveness for student loan borrowers who qualify. Most private loans don’t have those options.
However, private student loans could come with significantly lower interest rates than federal student loans if you have good credit. Federal loans come with standard rates between 3% and 7% and don’t reward good credit (or punish bad credit).
After exhausting free funding, the most ideal route is to borrow a subsidized federal loan — which won’t accrue interest while you’re in school — then consider refinancing once the repayment period starts, you’ve built a strong credit history and feel confident in your ability to make monthly payments for the term of the new loan.
Even most private student loan lenders encourage borrowers to look into federal funding before taking out a private loan while you’re in school. They’re generally designed to fill gaps for students who aren’t eligible for enough in federal student loans to cover their costs to attend college.
Student Loan Costs to Consider
When you evaluate private student loan offers, you’ll probably focus on the interest rate, because that has a significant impact on the long-term cost of the loan. But there are other costs to consider.
Before accepting any loan offer or signing the agreement, make sure you know how much you’ll pay (if anything) in these common costs:
- APR: Annual percentage rate is commonly called the interest rate (though they’re a little different). It’s usually the most prominently advertised feature of student loans. Student loan interest rates tend to fall between 3% and 11% and can be fixed or variable — the latter means they’ll change with the prime rate. A higher credit score can get you a lower interest rate and vice versa.
- Origination fee: Some lenders charge a fee to receive your loan, though that’s less common with student loans than other types of loans. Origination fees are usually around 2% or 3% of the loan amount. They come out of the amount disbursed to the school, so you likely won’t notice them unless you’re very particular about math.
- Late fee: Most loan agreements come with a fee for late payments, usually a percentage of the payment due. Many student loan lenders are doing away with late fees and building in options for flexible repayment, so shop around to compare your options!
What Is a Cosigner?
A cosigner is someone who shares the responsibility of a loan with the borrower. If you — the borrower — can’t qualify for a loan on your own because of bad credit or no credit, you could apply with a cosigner with good credit to qualify.
You receive the funds, but you both bear responsibility for repaying the loan, and repayment or default impacts both credit scores.
Cosigners are common for private student loans, because many people entering college are young and have almost no credit history. You can cosign with a parent, guardian or other creditworthy person, who basically guarantees the loan in case you don’t repay.
Student loans often come with an option for cosigner release, so the cosigner doesn’t have to stay tied to the loan for years after the student’s left school and gone off on their own. Cosigners can usually be released after around 12 to 36 months of on-time payments, with proof of the borrower’s income.
Who Can Take out a Private Student Loan?
Any student can usually apply for a student loan from a private lender, but creditworthiness determines whether you’ll be approved.
Lenders generally have basic requirements for student loans, as well, including:
- You must be enrolled at least half-time in a degree-granting institution.
- You must be the age of majority in your state (usually 18 or 19).
- You must be a U.S. citizen or resident.
Some lenders make exceptions for these, though. For example, Ascent offers a Bootcamp Loan, which wouldn’t come with the enrollment requirement. Some lenders also make loans for international students who aren’t U.S. residents.
How to Get a Private Student Loan
Follow these steps to apply for a private student loan.
- Weigh your options. Before turning to private loans, fill out a FAFSA to see your options for federal financial aid. This doesn’t commit you to taking out a federal loan, and it has no affect on your credit score; it just gives you all the information you need to make a decision. If federal aid won’t cover your costs, look into private loans.
- Find a cosigner. If you don’t have strong credit, get a cosigner on board before you apply. Use a site like Credit Sesame or Credit Karma to check your credit score and history for free to see where you stand.
- Get pre-qualified. Lenders let you fill out a little information about yourself — usually all online — and run a soft credit check to give you an idea of the interest rate and loan terms you could qualify for. That lets you compare offers before submitting to a hard credit inquiry that impacts your score. Marketplaces like Credible and LendKey let you see and compare several pre-qualified offers with one application.
- Choose a lender. Choose the loan offer that looks like the best fit for you, and finish your application with the lender. You can usually do this part all online, too. The lender will run a hard credit check and might need more information from you, like proof of income. You could get a decision as soon as the same day or after a few days, depending on the lender’s process.
- Accept your loan. Once approved, you can review and sign your loan agreement — remember to note any fees! — and accept your funds. Lenders send student loan funds directly to your school to pay for tuition and fees, and the school will send you a refund for any extra amount.
Frequently Asked Questions (FAQs) About Student Loans
We’ve rounded up the answers to some of the most common questions about where to get the best private student loans.
