Private Student Loans

Introduction to Private Student Loans

Private student loans can be a great way to cover the cost of attending college when savings, scholarships and federal aid aren’t enough. Private loans for college can be used to cover school expenses such as:

  • Tuition
  • College Dorms/College Apartments
  • College Textbooks
  • Student Travel (to/from school)
  • Lab Fees
  • Student Computer
  • Study Abroad
  • College Food

Private loans for college are credit-based student loans that aren’t backed by the federal government. Unlike the Stafford Loan for students and PLUS Loan for parents, private student loans aren’t affiliated with the federal government, making it more like a traditional consumer loan. Private student loans may have less paperwork than a federal loan so it’s generally faster to apply. Federal student loans are usually a better deal for students, but the federal government has low borrowing limits, which may not cover your total cost of education. So if you still need financial aid after you borrow federal loans, that’s where private student loans can help!

Why use Private Loans for College?

Although free money and low interest federal loans are obviously the best ways to pay for college, they often just aren't enough. Not all students qualify for scholarships and grants, or may not be able to acquire enough to cover the total cost of college. Federal loans have annual borrowing limits, based on your grade level and student status. Unless you or your parents have additional cash or savings, you will probably need to borrow private loans for college.

Private student loans may be a less expensive financial option than using credit cards, personal loans or home equity lines of credit. Private loans for college may also have loan terms established specifically for students, compared to other financial vehicles. Some of these terms may include in-school deferment of payments, no pre-payment penalties, hardship deferment/forbearance options and school certification processes.

When to Use Private Student Loans

Students may need private student loans when there is a gap between the cost of college and financial aid awarded (including free money and federal aid). The more expensive the school, the bigger the gap can be. As an example, the average annual cost for a 4-year private university totals $42,419 for the 2014-15 school year1.

Now, let’s look at an example below of a college freshman’s financial aid award package. In this example, at the average annual cost of a 4-year private school, a college freshman would still need $23,419 annually to pay for school.

School Awarded Scholarship $6,500
Privately Awarded Scholarships $2,500
Federal Stafford Loan $5,500
Family Contributed Savings $4,500
Total $19,000

If you are experiencing a gap between the amount of financial aid you received and the amount you must pay for school, you should do some research on private student loans.

Determine Your Borrowing Needs

If you have exhausted all of your financial aid, and you still need money to pay for school, you should determine how much you will need to borrow in private student loans. Since private loans for college are credit-based, you’ll need to get approved for the loan amount you need.

Here is how to calculate the amount you will need to borrow in private student loans:

  1. Find Your Cost of Attendance

    The total cost of attendance for your school is likely published in admission materials and on your school’s financial aid website. It generally includes tuition, fees, room & board, books, and an estimated cost for common student expenses, like travel. Your expenses may be different from this published number, depending on your situation. For instance, expenses may differ if you are taking more or less credits, or you are living at home instead of in the college dorms. Use the figures provided by your school to estimate what your total college expenses will be for the school year.

  2. Gather Financial Aid Information

    Your award letter is the most common place to access the financial aid awarded to you by your school, including college scholarships, grants and federal loans. You will also need to gather the amounts of any privately awarded financial aid, such as scholarships from your community or workplace. If you want more information about specific types of financial aid, check out our College Financial Aid section.

  3. Calculate the Gap

    Subtract your total financial aid awards from your total cost of attendance (#1-#2 above). This is the amount that you still need to come up with to pay for school, either through family contributed funds or private student loans. If you prefer, use our Financial Aid Calculator to do the math for you!

The amount you can borrow in private student loans each year is limited to your school's cost of attendance minus any financial aid you have already received. You should also be aware that just because you need to borrow a certain amount in private student loans, does not mean you will automatically qualify for the full amount. The amount you can borrow will be determined by your credit history and if applicable, that of your co-signer.

Understanding Credit

Most students will need to apply with a credit-worthy co-signer in order to obtain a private student loan. College students generally don’t have a long-standing credit history, or significant income, and most lenders are unwilling to give money under these circumstances.

Even if you have enough income and credit history to be approved for private student loans on your own, using a co-signer may help you improve your loan terms. Private student loans with a co-signer generally have lower interest rates and better terms than when a student applies on his/her own. Using private student loans with a co-signer:

  • May lower your interest rate
  • May lower your origination fee
  • May increase the amount of money that you are eligible to borrow (if the school agrees that it's needed)

For more information, including how to get approved for private student loans, see our sections on Private Loan Credit and Credit for College Students.

1CollegeBoard, Average Published Charges for Full-Time Undergraduates by Type and Control of Institution, 2014-15 (Enrollment-Weighted)