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Kendall Little · Senior Writer, Credit Cards K Kat Tretina Updated Wed, January 14, 2026 at 4:57 AM GMT+8 8 min read Consider this conundrum: If you're a dependent first-year college student, the maximum amount of federal loans you can qualify for is $5,500 per year (not including parent PLUS loans). But the average total cost of attendance at a four-year public school was $25,850 for the 2025-26 academic year; federal loans would pay for less than 25% of the cost.
If you've exhausted scholarships and grants and reached the limit for federal loans you qualify for, how do you cover the gap?
This scenario is why many borrowers turn to private student loans. But private debt can greatly differ from federal education debt. Understanding how private loans work will help you make informed choices as you consider your financing options.
See what rates you could qualify for on private student loans.
What are private student loans?
Private student loans offer another option — beyond the more common federal student loans — for borrowers to pay for college or graduate school.
The U.S. Department of Education is the lender behind federal student loans, while private student loans are issued by a range of banks, credit unions, nonprofit organizations, and for-profit financial institutions.
Private student loans make up a small percentage of the total student loan market. They can be more expensive than federal student loans, and may not have the same benefits, such as deferment, forbearance, and forgiveness options.
In general, it’s usually best to max out your options for federal grants and loans before considering private lenders. But private student loans can be useful tools when you need additional financing to complete your degree.
Types of student loans from private lenders
Loan options vary by lender, but private lenders usually offer three different types of student loans:
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Undergraduate private loans: Undergraduate loans are for students pursuing associate or bachelor's degrees at community colleges or four-year schools.
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Graduate private loans: Graduate private loans are for graduate school and doctoral programs, including medical school, master's of business administration (MBA) programs, and law school.
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Parent loans: Parent loans allow other family members to borrow on behalf of the student. Unlike federal parent loans, private parent loans are often available to other relatives, such as grandparents or legal guardians, and they can be used to pay for both undergraduate and graduate programs. With private parent loans, the student has no legal obligation to repay the loan; it's solely in the parent or family member's name.
How private loans work
Once issued, private loans work similarly to federal loans. If you're approved for a loan, the lender typically sends the money directly to your college. Your school will apply it to your tuition bill and other required fees. If there's money left over, you'll receive the remainder to use for your other expenses, such as transportation or textbooks.
However, private student loans differ from federal loans in several ways:
Borrowing amounts
Most federal student loans have limits on how much you can borrow per year and over your lifetime. However, you may still have the option of using federal PLUS loans as a supplement after you meet the limit for Direct Subsidized and Unsubsidized Loans.
By contrast, private student lenders usually allow you to borrow up to the school-certified cost of attendance.
Eligibility
Unlike most federal student loans, private loans are credit-based. The lender will check your credit and income to determine your eligibility for a loan and set your rates. The requirements vary by lender, but students usually need good to excellent credit — a FICO score between 670 and 850 — and must meet minimum income requirements, such as $25,000 annually.
Few college students meet those criteria, so most students need a co-signer to qualify for a private student loan. According to a 2025 report from Enterval Analytics, approximately 95% of private undergraduate student loans are co-signed.
Rates
Federal student loans have fixed interest rates, and borrowers qualify for the same rate regardless of their credit history or financial background. For the 2025-26 school year, Direct Subsidized and Unsubsidized Loans for undergraduates carry a fixed interest rate of 6.39%.
That's not the case with private loans — your rate varies based on your credit and other factors. In addition, your loan can have fixed or variable rates. If you have a variable-rate loan, the rate can change over your repayment period. Today, private student loan rates can range as low as 3% and as high as 17% or even more.
In-school payments
Many private lenders require borrowers to make some form of monthly payment while the student is in college. Depending on the lender, you may have the following payment options while you're in school:
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Immediate: You make full interest and principal payments as soon as the loan is disbursed. Although this plan has the highest in-school monthly payment, it has the lowest overall loan cost. Lenders typically charge lower rates for borrowers who choose this type of plan.
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Interest-only: With interest-only payments, your monthly payments cover only the interest that accrues. This option offers a smaller payment than immediate repayment, but a higher overall repayment cost.
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Fixed: Fixed repayment plans allow borrowers to make small payments while in school, such as $25 per month. This option has a higher overall cost than immediate or interest-only repayment, but the in-school payments are more manageable, and you are reducing some of the interest that accrues.
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Deferred: If you opt for a deferred payment plan, you don't have to make any payments until after you graduate or leave school. However, this option has the highest overall repayment cost, and lenders usually charge borrowers on this plan a higher rate.
Repayment terms
When you apply for a private student loan, you may have more control over the loan term than you do with federal loans. Depending on which lender you choose, you could have a loan term as short as five years or as long as 15 years.
A longer repayment term can be appealing because it gives you a more affordable monthly payment. But you'll usually pay a higher rate, and more interest will accrue over time.
If your goal is to minimize your total repayment cost, choose the shortest term that gives you a monthly payment you can manage.
Should you get a private student loan?
Private student loans can be a good way to supplement the financial aid you get from federal loans — especially if the federal loans you qualify for don’t cover the full amount you need or if you don’t qualify for federal loans at all.
Depending on your credit history (or the credit history of your co-signer), you may be eligible for private loans with competitive interest rates, loan terms, and repayment plans. With some lenders, you can even check to see whether you prequalify and the rates you’re eligible for before you apply.
However, federal loans come with a lot of benefits and protections that can help you over the long term (like loan forgiveness and deferment programs), which makes them a smart first choice for financing your education.
See how much you could pay with today’s private student loan rates.
How to borrow a private student loan
Private student loans don't have a centralized application like federal loans. Instead of filling out the Free Application for Federal Student Aid (FAFSA), you'll have to apply through the individual lender.
To take out a private student loan, follow these steps:
1. Gather information
Save time during the application process by gathering some information and documentation ahead of time. You will likely need the following:
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Your Social Security number
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A form of government-issued identification, such as a driver's license or passport
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Employment information
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Proof of income, such as a recent paystub or your tax return
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Details on your college, program, and target graduation date
2. Find a co-signer
Since most private student loans are co-signed, you will likely need to find someone to act as a co-signer. A co-signer can be a parent, relative, or trusted friend who has good credit and meets the lender's income requirements.
The co-signer will have to fill out their own application and provide details about themselves and their income.
3. Shop around
Because rates and terms can vary by lender, it's a good idea to shop around with different companies before deciding on a lender. Many companies allow you to prequalify for a loan and view options with a soft credit check, which doesn't impact your credit.
4. Fill out a loan application
Once you find a loan that works for you, you (and your co-signer) can fill out the application. You will also have to consent to a hard credit check, which could cause your score to temporarily drop by a few points.
Once you apply, the lender will review your information and determine if you qualify for a loan. The lender will also certify the loan amount with your college.
5. Review and sign the loan agreement
If the lender approves your application, it will send you a loan disclosure form. The final loan terms may be different than the prequalification offer, so make sure you review it carefully to understand the interest rate, fees, and payment amount.
If you're comfortable with the loan's terms, sign and return it to the lender. The lender will then work to disburse the loan to your school.
Tip: Private student loans aren't eligible for federal loan forgiveness programs or income-driven repayment plans, so be sure to complete the FAFSA and utilize federal loans first.
This article was edited by Alicia Hahn.
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