Private Student Loans: How They Work and How They Compare to Federal Loans
Private student loans offer a way for students to pay for their education outside of federal aid and scholarships. While federal loans are provided by the government, private loans come from lenders like banks and credit unions. They have their own application process and your interest rate is determined by your credit worthiness.
Students often use private loans as a way to fill in the gaps from grants, federal loans and scholarships. It’s usually best to max out these options before you apply for private loans. We’ll go over why this is the case, how they work differently than federal loans, when you should and shouldn’t use them, and how to compare lenders.
What Are Private Student Loans?
Private student loans are education loans from banks, credit unions and online lenders that help cover college costs. They require a credit check because your approval and rate will depend on your (or your co-signer’s) credit history. They also have their own approval and application process, so you won’t have to fill out a FAFSA. You can use these loans for undergraduate and graduate degrees, plus technical or vocational training. Borrowing limits are often higher than with federal loans. However, they work differently from federal student loans, and it’s important to know what you’re signing up for before you use them.
Private vs. Federal Student Loans
The biggest difference between private and federal student loans is where the money comes from — private lenders like banks vs. the federal government. Because the money comes from the government with federal loans, the government also determines your interest rate. Federal loans provide protections such as income-driven repayment, forgiveness programs and forbearance, and rates are typically lower. For undergraduate federal loans, the interest rate is 6.52%, according to the U.S. Department of Education. Private student loan rates are anywhere from 2% to about 18% these days, depending on the lender. These are the main reasons why experts recommend exhausting other options before supplementing with private loans.
| Loan type | Rates | Hardship options | Co-signer required | Loan limits |
| Private | Determined by credit history (often higher) | Depends on lender, not guaranteed | Often yes | Typically capped at cost of attendance |
| Federal | Determined by Congress (often lower) | Yes | No | Set by government |
Borrow in the Right Order: Where Private Loans Fit
There are several other options for paying for college that you can turn to before using private loans. Overall, this is the order you should try to follow:
- Free money: Find as many scholarships and grants as possible that you can apply for. You don’t have to pay them back.
- 529 plans (if you have one): These are tax-advantaged savings accounts sponsored by your state that help families save for education expenses. Use them for qualifying costs, and if you have some leftover, you have options like moving the money into a Roth IRA.
- Federal loans: These usually have lower interest rates than private loans and you have more options if you struggle to pay them back.
Starting with the cheaper options first saves you money and gives you more protections. Private student loans are a viable choice when you need it, but they should not be the primary way you pay for school if possible.
More from The Penny Hoarder: Not sure how to manage your money as a college student? Read our guide to making a college budget.
Why More Borrowers Are Considering Private Loans in 2026
Changes to federal loans may make more people turn to private loans. Graduate students in “professional programs” can now borrow up to $50,000 a year and $200,000 overall. The limit is $20,500 ($100,000 lifetime) for all other graduate degree programs. Parent PLUS loans are now limited to $20,000 per year per student, with a lifetime cap of $65,000. These are loans that parents can take out to pay for their children’s college education, and parents are the ones who pay it back.
It’s important to note that what’s considered “professional” is not set in stone because of some back and forth in the courts as of August 2026.
How Private Student Loans Work
If you are considering private loans, these are more or less the steps you’ll follow:
- Find a cosigner: Most private loans will require a cosigner. This person should know they are on the hook for paying back the loans if you don’t and that their credit can be affected if you miss payments.
- Find a lender: This could be a bank, credit union or online lender.
- Apply: Whether or not you’re approved and the kind of interest rate you’ll get depends on you and your cosigner’s creditworthiness. The better your credit, the lower your interest rate, typically.
- Choose your rate type: You’ll likely have the option between a fixed or variable rate. Fixed rates stay the same throughout the loan, while variable rates change based on market conditions. What you end up with is ultimately decided by the lender, so it’s a good idea to compare.
- Funds dispersed: The money will go straight to your school most of the time.
- Repayment: Private loan lenders are not required to offer flexible and affordable repayment plans. Although some might, be prepared to repay it exactly how you promised. Some lenders also may require you to start paying the loan back before you graduate.
Do You Need a Cosigner?
You will most likely need a cosigner for private student loans. That’s because most undergraduate borrowers don’t have the credit history and income to qualify alone, and a cosigner can also lower the rate. You may be able to find a lender that doesn’t require it, but it’s not common.
Whoever does cosign should be prepared to pay back the money on your behalf, as they are responsible for making payments if you don’t. Late payments will also affect their credit score. The good news is that some lenders offer a cosigner release, which means the cosigner can come off the loan after you make a certain number of payments.
We also have a guide on how cosigning works.
Private Student Loan Rates: Fixed vs. Variable
Federal student loans are fixed rate loans, so they stay the same for the life of the loan. This makes monthly payments more predictable. Private loan lenders may offer fixed rate or variable rate loans. Variable rates may seem like an attractive option if they start out lower, but they change with the market. That means they could go up and make your payments more expensive.
Rates for federal loans also are determined by Congress. For private loans it depends on your and your cosigner’s credit history, income and the loan term. That means the rates are typically much higher for private loans — 2% to 18% vs. 6.52% for federal.
How to Choose a Lender
Look for and compare these criteria when shopping for a private loan lender:
- APR: this is your interest rate plus fees — so the cost of taking out the loan. Offers will vary among lenders, so check with more than one and see which kind of rate they’ll offer (fixed or variable).
- Fees: Do they charge an application, origination or prepayment fee? Those will make the loan even more expensive.
- Loan range amounts: Make sure the lender lets you borrow as much as you’re looking for.
- Cosigner policies: Is it important to you not to have one? Compare lenders to find one who doesn’t require it or offers the cosigner release option.
- Repayment options: Some lenders require you to start making payments before you graduate. If you’d rather defer, make sure that’s an option.
- Hardship options: Although they aren’t required to offer these like federal loans are, that doesn’t mean they won’t. It can offer some peace of mind knowing you have choices if you’re struggling to make payments.
It’s important to compare your options because they will be different among lenders. Make sure to shop among banks, credit unions and online lenders to get the full picture.
Managing and Repaying Private Student Loans
If you do end up with private loans, you’ll need to stay on top of payments. There are a few things you can do if you start struggling.
Again, just because private lenders aren’t required to have hardship options, doesn’t mean they won’t. See if forbearance, or a temporary pause or lowering of your monthly payments, is an option. You also may be able to refinance for more manageable terms or get a temporary rate reduction.
It’s a good idea to ask about these before signing up for private loans. You don’t want to find out there’s no budging on these offers once you’re already locked in.
Frequently Asked Questions
Federal student loans come from the U.S. Department of Education and carry borrower protections that private loans generally don’t — fixed interest rates set by Congress, income-driven repayment plans, forgiveness programs, and deferment and forbearance options. And they don’t require a cosigner. Private student loans come from banks, credit unions and online lenders; approval and your rate are based on credit (yours or a cosigner’s), and they lack most federal protections. The general guideline is to use federal loans first and turn to private loans only to fill a remaining gap.
Generally, no. Private student loans aren’t eligible for federal forgiveness programs like Public Service Loan Forgiveness or income-driven repayment forgiveness — those apply only to federal loans held by the Department of Education. Some private lenders may discharge a loan in specific circumstances such as the borrower’s death or permanent disability, but they don’t participate in government forgiveness programs. This is one of the biggest trade-offs to weigh before choosing a private loan over federal aid.
Usually, yes — most undergraduate students need a creditworthy cosigner (often a parent) because they don’t yet have the credit history or income to qualify on their own, and a cosigner can also help you get a lower rate. Keep in mind the cosigner is equally responsible for the loan, and missed payments affect both of your credit scores. Some lenders offer cosigner release after a set number of on-time payments, and a few offer no-cosigner loans for qualified borrowers.
They can be a reasonable way to cover a funding gap — but only after you’ve exhausted grants, scholarships and federal student loans, which are typically cheaper or come with more protections. A private loan makes the most sense for a creditworthy borrower (or one with a strong cosigner) who has maxed out federal aid and understands the trade-offs: a credit-based rate, fewer hardship options and no federal forgiveness. Borrow only what you need, and compare several lenders before committing.
Yes. If your credit and income have improved since you borrowed, refinancing a private student loan with a new private lender may lower your rate or change your term. Because private loans don’t carry federal protections, there’s typically less to lose by refinancing them than there is with federal loans.
