Affording higher education is increasingly difficult for many families. Consider that over the past two decades, the average tuition and fees at public four-year colleges have surged by 179%, according to the Education Data Initiative, which reports that the average annual cost of college per student is $38,270 as of 2024. Family savings and financial aid in the form of federal student loans, scholarships and grants are often not enough. Fortunately, there’s another option that can help make up the shortfall: a private student loan.
Here’s more information about private student loans, including how they differ from federal student loans, qualification requirements and when you might need a cosigner.
[Read: Best Private Student Loans.]
What Are Private Student Loans?
Private student loans are issued by private entities like banks, state-based or state-affiliated organizations, or credit unions. Conditions and terms are established by the lenders, not the government.
These loans are taken out by the student but often co-signed by a parent or other adult who has demonstrated creditworthiness. The funds are usually disbursed directly to the school.
Federal student loans, by contrast, are provided and funded by the government. The three main types of federal loans include the Direct Subsidized Loan program (offered to undergraduate students who demonstrate financial need), the Direct Unsubsidized Loan program (offered to undergraduate and graduate students regardless of need), and Direct PLUS Loans (for graduate and professional students).
Federal student loan terms and benefits are set by law. These include fixed interest rates and income-driven repayment plans, which are typically not offered by private lenders. Federal loans are also generally less expensive than private student loans.
Here are some of the major differences between private and federal student loans, according to the U.S. Department of Education:
| Private student loans | Federal student loans | |
| Interest rate | Private student loans may have variable or fixed interest rates, which can be higher or lower than federal loan rates depending on your situation. | Federal student loans have fixed interest rates that are typically lower than those of private loans and significantly lower than many credit card interest rates. |
| Repayments due | Some private student loans require payments while you’re still in school, although some lenders allow you to defer payments until after graduation. Check with your lender on repayment options. | Repayments start only after you graduate, leave school, or drop below half-time enrollment. Various repayment plans are available, including options that base your monthly payment on your income. |
| Postponement rules | Check with your lender. | If you encounter repayment difficulties, you may be able to temporarily postpone or reduce your payments. |
| Loan forgiveness option | Many private lenders do not offer loan forgiveness programs, but certain state agency loans may be forgiven under specific conditions. | You might qualify for loan forgiveness if you work in public service. |
| Credit rules | Private student loans often require a strong credit history or a co-signer. | No credit check is required for federal student loans, except for PLUS loans, which do involve a credit check. |
| Subsidies | These loans are typically unsubsidized, meaning you’re responsible for all the interest accrued. | If you demonstrate financial need, you may be eligible for subsidized loans, where the government pays the interest while you’re in school at least half-time and during certain other periods. |
| Refinancing and consolidation rules | These loans cannot be consolidated into a Direct Consolidation Loan but may be eligible for refinancing. | Federal student loans can be consolidated into a Direct Consolidation Loan. |
“Private loans typically have higher interest rates and less flexible repayment terms than federal student aid,” says David Blain, Chartered Financial Analyst® and CEO of New Bern, North Carolina-based BlueSky Wealth Advisors. Blain has extensive experience advising clients on various student loan options and says that private loans “have stricter eligibility criteria like a minimum credit score and debt-to-income ratio.”
Eligibility Requirements for Private Student Loans
Qualifying for a private student loan may be more difficult than for a federal student loan. That’s because private student loan providers typically require a strong credit history or a co-signer and may ask for proof of income, Federal student loans don’t generally require a credit check or income verification.
“Private student loans are subject to credit underwriting, meaning credit score and income matter, and have far fewer built-in legal protections during repayment,” explains Jack Wang, a college financial advisor with Innovative Advisory Group in Tewksbury, Massachusetts, and host of the upcoming Smart College Buyer podcast.
Here’s a closer look at some of the private loan eligibility rules.
Age and Citizenship
Applicants must generally be at least 18 years old and either a U.S. citizen or permanent resident to get a private student loan. Some lenders may consider international students if they have a U.S. citizen co-signer.
Minimum Credit Score
Personal finance expert Dennis Shirshikov, adjunct professor of economics at CUNY–Queens College, says most private lenders require a minimum credit score of around 650, “although higher scores will secure better terms and lower interest rates.”
Income and Employment
Private student loan lenders typically look for a stable income and employment history. Some lenders will require that the borrower or co-signer have a minimum annual income of $35,000.
School
Typically, the student must be enrolled at an accredited institution to qualify for a private loan, although some private lenders will issue a loan even if you enroll in an unaccredited school or nondegree program. Ask your lender what they require and if they have a specific list of eligible colleges and universities.
You may also need to be enrolled at least half -time at your school to qualify for a private loan, depending on the lender’s rules.
Covered Expenses
Private student loans typically cover tuition, room and board, books, transportation costs, a personal computer or laptop, and other related educational expenses. Your lender may also allow the funds to pay for personal expenses like food and groceries, clothing, toiletries and other miscellaneous items. Usually, private student loan funds are sent directly to your school, which will apply them to your tuition and other fees; any remaining amount after covering these charges is then given to the student, who can use the funds for additional expenses like living costs. If in doubt, ask your lender which expenses are covered versus not covered.
[Know the risks and rewards of private student loan refinancing.]
Qualifying With a Co-Signer
If you are a young student requiring extra funds, chances are you probably won’t qualify for a private student loan with bad credit or an insufficient credit history. And you likely won’t qualify for a private student loan with low income, either. Or even if you’re eligible, you may want to try for a lower interest rate than you’re offered. That means you’ll need a co-signer.
A co-signer is someone who agrees to share responsibility for repaying a loan with the primary borrower. Generally, this means a parent, guardian, relative or other creditworthy adult. Only one person can cosign a student loan, and the co-signer is equally responsible for repaying the loan. Missed or late payments are likely to appear on both the borrower’s and the co-signer’s credit report. Additionally, if the loan enters default status, the co-signer may be sent to collections and face legal action.
Wang says a co-signer is commonly used by college student borrowers today because, “for traditionally undergraduate students, getting a private loan themselves is extremely difficult.”
Today, nearly 91% of all undergraduate loans are co-signed, according to a private student loans report by Enterval Analytics LLC in 2023.
Co-Signer Requirements
Lenders can impose different rules for co-signers. But in general, the co-signer must be a U.S. citizen or permanent resident, have a valid Social Security number, be of legal age in their state (typically at least 18) and meet the lender’s minimum credit criteria.
Also, the co-signer should have an acceptable minimum credit score — usually at least 670 — and annual earnings of $35,000 or more.
“This additional assurance reduces the lender’s risk and can result in better loan terms for the borrower,” notes Shirshikov.
[Private Student Loans vs. Federal Student Loans: What’s the Difference?]
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Here’s What You Need to Qualify for a Private Student Loan originally appeared on usnews.com
