What is a private student loan?

Private student loans originate with a bank, credit union or online lender — unlike federal student loans that are handled by the federal government.

You can use both federal and private loans to pay for school, but federal loans typically have more favorable terms, including lower interest rates, flexible repayment options and loan forgiveness. For those reasons, it’s best to prioritize federal student loans before private loans.

Private student loans can be a good option if:

• You have already completed the Free Application for Federal Student Aid, or FAFSA, to see if you’re eligible for federal grants and work-study programs.

• You have already borrowed the maximum in both subsidized and unsubsidized federal student loans.

• You or a co-signer have good credit (a credit score of 690 or above). Many private student loan borrowers apply with a co-signer to improve their chances of qualifying.

• You borrow only what you need and expect you can repay.

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Student Loan Terms to Know

• Deferment: A period of authorized nonpayment that pauses student loan payments for up to three years. Deferment can be a good option if you have a federal subsidized and can’t afford to make payments now, but will be able to soon. If you need a longer-term fix, consider income-driven repayment instead.

• Delinquent: The status of a student loan after one or more missed payment. Loans enter default after a prolonged period of delinquency. While you will probably face late fees, you can avoid credit damage and default by quickly paying the past-due amount.

• Disbursement: The process of releasing loan funds to the borrower or directly to the school.

• Fixed interest: An interest rate that does not change during the life of a loan. All federal student loans have fixed interest rates, but private loans can offer fixed or variable interest rates. Fixed interest is the safer option because you don’t have to worry about your rate — and payment — increasing.

• Variable interest: Variable interest rates can change monthly or quarterly depending on the loan contract and come with rates caps as high as 25%. Variable interest loans are riskier than fixed interest loans but can save you money if the timing is right.

• Origination fee: The fee a borrower pays to offset a lender’s cost for issuing a student loan. All federal student loans have origination fees, while many private student loans don’t. Origination fees typically have a minimal effect on undergraduates with lower loan amounts, but can be costly for graduates and those with higher loan totals.

• Prepayment: Prepayment is when you pay off part or all of your loan before the scheduled due dates.

How much can I borrow for college?

Only borrow what you need and can expect to pay back. Start with federal loans, and take private loans if you need additional funds to pay for college.

The maximum in federal student loans you can borrow depends on your year in school, whether you’re a dependent or independent student and the type of loan. With private loans, the amount you borrow can’t exceed your school’s total cost of attendance, less other financial aid.

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How do I choose a private student loan online?

• Compare loan offers: Check options from multiple lenders including banks, credit unions, online companies and state-based lenders to find the lowest interest rate.

• Decide on fixed or variable rate: Depending on the lender, you may be able to choose a fixed or a variable interest rate. A fixed rate stays the same throughout the life of a loan; a variable rate may start out lower than a fixed rate, but could increase or decrease over time depending on economic conditions.

• Choose a loan term: You may also have the option to choose your loan term. A short term gives you higher monthly payments, but also faster repayment and less total interest. A longer term allows you to pay less each month, but more interest over a longer period of time.

• Consider borrower protections: A private lender may offer deferment, forbearance or another temporary repayment adjustment if you can’t afford your payments.

Will I need a co-signer for a private student loan?

If you have no income and no credit or bad credit, you’ll need a co-signer to get a private student loan. Without bills in your name, such as a credit card, car loan or utility, it's hard to demonstrate that you can pay bills on time. Your co-signer will need a steady income and good credit scores. A co-signer is responsible for repaying the loan if you fail to make payments.

Some private lenders will let students apply without a co-signer. Instead of basing your loan offer on your credit, they look at your academic performance and earning potential to determine your ability to pay back the debt.