What Is a Private Student Loan?

Private student loans are offered by banks, credit unions and online lenders to help students pay for college. They are best used as a last resort to bridge any funding gaps between your federal student loans and your cost of attendance.

» COMPARE: NerdWallet's picks for the best private student loans

How do I qualify for a private student loan?

Private lenders look for student loan borrowers who have the following:

• A strong credit score — usually in the mid-600s or better.

• A steady income that covers your monthly expenses.

Because of the credit requirements, many undergrad students must apply with a co-signer to get a private loan. There are a few niche private lenders that don’t consider credit scores, but those loans can carry higher interest rates. Most loans are for full-time students, but there are also some private student loan options for part-time students.

» MORE: How to apply for student loans

How much can I borrow in private student loans?

Private loans max out at your college’s cost of attendance, minus any financial aid. Each lender may have its own limits for the total debt you can take on. For example, Ascent limits lifetime borrowing to $200,000 for undergraduate loans and $400,000 for graduate loans.

Meanwhile, federal direct loans are capped at $57,500 total for undergraduates, and up to $138,500 for graduate students, including their undergraduate borrowing. Federal PLUS loans, which have higher interest rates, have no lifetime limit and are limited at cost of attendance.

Even with high borrower limits, only take out what you need. You’ll have to repay the amount you take out, plus interest.

» MORE: Student loan maximums

Why are federal student loans preferable to private loans?

Federal student loans are better first choice than private loans for several reasons:

• You don’t need a credit history, income or a co-signer.

• The interest rate on federal loans tends to be lower.

• Federal loans offer benefits like income-driven repayment plans and student loan forgiveness opportunities.

To get a federal loan, submit the Federal Application for Federal Student Aid, or FAFSA. You don't need to complete the FAFSA to get a private loan, but you should do it anyway. The application is also the key to accessing free financial aid like need-based Pell Grants, scholarships and work-study.

» MORE: Federal vs. private student loans: Compare key differences

How long does it take to pay off a private student loan?

Private student loan repayment terms vary by lender. Some offer only one 10-year repayment term, which is the standard term for federal loans. Others have terms ranging from five to 20 years.

Most private lenders let you defer payments until after you leave school. But some private lenders expect you to make small, interest-only or fixed payments while you’re enrolled. When you leave school, you usually get a six-month grace period before a bill arrives.

Your loan collects interest daily when you defer payments and during your grace period. The interest may also capitalize when you exit your grace period, which means it is tacked on to your principal balance — increasing your monthly bills and the amount you’ll pay over time.

Private student loan interest rates: Fixed vs. variable

Generally, private loans have higher interest rates than federal loans. The higher your or your co-signer’s credit score and income, the more likely you are to qualify for a lower interest rate.

It’s possible to get a private student loan interest rate that is lower than the federal rates. To do this, you’ll need excellent credit and a lender that offers rates below those offered by the federal government. But even if you get a lower interest rate with a private lender, you’ll forgo the extensive borrower protections that come with federal loans.

Most private lenders offer two options for student loan interest rates: fixed and variable. A fixed rate stays the same throughout the life of the loan. A variable rate changes periodically, depending on the interest rate environment. A fixed rate means predictable payments; if you choose a variable rate, your monthly bills could rise or drop significantly in the future.

Always compare private student loan offers from multiple lenders. Interest rates aren't the only thing to consider: Fees, repayment options and borrower protections are all important, too.

How to get a lower interest rate on private student loans

If you don’t get the best rate on a private student loan now, you could get a lower rate in the future by refinancing private student loans. That means a private lender pays off your current loans and gives you a new loan with a lower interest rate and repayment term. There’s no limit to the number of times you can refinance your student loans.