Types Of Private Student Loans & How To Choose

Private student loans are a type of personal loan specifically designed to pay for education-related expenses. These loans are offered by banks, credit unions, state agencies, universities and online lenders. Private student loans can serve as a lifeline when other forms of aid fall short, as many lenders offer amounts equal to your full cost of attendance.

However, these loans are not a one-size-fits-all type of product. You’ll need to compare multiple options before deciding on one to get the best loan for your needs.

1. Degree-specific loans

On a basic level, private lenders typically offer undergraduate and graduate student loans. However, some may also go beyond that with degree-specific loans for medical, dental and business school, as well as for law degrees. You may even be able to get a loan to cover costs while you study for the bar exam or for your time at a community college.

Degree-specific loans may have perks uniquely tailored to the needs of that program. For instance, medical school loans tend to offer higher loan limits and longer grace periods compared to those offered for other graduate degrees to accommodate the significant cost and multiyear commitment of medical study and credentialing.

2. Parent loans

Some private lenders offer education loans issued to the parent or parents of the student. Parent loans typically function like any other private student loan in terms of interest rates, repayment terms and grace periods. The difference is that the parent — not the student — will be responsible for making payments.

If you’re a parent looking to take out a loan for your child’s education but don’t want to be the sole one responsible, you can also look into cosigning. Some private student loans even offer a cosigner release, which means you could be taken off the loan after a set number of consecutive, on-time payments.

3. International student loans

International students may have a hard time getting approved for credit when they need it. One reason for this is that some lenders see them as higher-risk borrowers and may not lend to noncitizens. Many of these students cannot apply for federal student aid, either, as the Federal Application for Student Aid (FAFSA) requires eligibility components that include citizenship or eligible noncitizen status and a Social Security number.

Some lenders specialize in student loans for international students who may not meet the standard requirements for traditional private loans, though international students may need to have a cosigner who is a U.S. citizen to be approved. These loans also typically come with higher-than-average interest rates.

4. Bad credit loans

If you need student loans and your credit history is poor or nonexistent, your best bet is federal student loans because they typically don’t require a credit check. However, some lenders offer bad credit student loans, which have less stringent credit requirements for college students who haven’t had the chance to build credit.

Bad credit private student loans usually consider factors other than your credit profile to qualify for borrowing, such as future career earnings and your field of study. On the downside, because these loans represent more risk, they tend to come with higher rates and fees than the average private loan.

If possible, look for a lender that allows cosigners, which may help you secure a lower rate. Just keep in mind that the cosigner is equally responsible for the loan.

5. State-specific loan programs

Many states offer private student loans through a specific state agency. Examples include the Rhode Island Student Loan Authority (RISLA), the Iowa Student Loan (ISL) Education Lending and the Bank of North Dakota.

These private student loans are typically reserved for students who are attending a college within the state’s borders, but some also offer loans for residents who are studying in another state. Eligibility requirements for these loans are based on the lender and will vary.

6. Income share agreements

Income share agreements function differently than traditional student loans. Instead of making a fixed monthly payment based on your student loan balance and an interest rate, you’ll pay a percentage of your income over a fixed number of years.

Before you apply for an income share agreement, figure out what the income percentage and repayment term will be. These agreements typically also have a salary floor and a payment cap to ensure that both parties are treated fairly.

7. Refinanced student loans

Several private financial institutions offer products to refinance student loans — private student loans used to consolidate your existing student debt. Refinancing your student loans might make sense if you can qualify for a lower rate, as doing so can potentially save you thousands of dollars in interest.

In addition, refinancing a loan with a longer term can make your monthly loan payments more affordable. But note that doing this will result in paying more interest over the life of the new loan. You’ll also lose access to federally sponsored repayment or forgiveness programs if you refinance federal loans with a private lender.

How to determine which private student loan is best for you

The best private student loan for you depends on your unique circumstances and priorities. Whether you’re looking for the lowest interest rate possible, discounts, unique perks or flexible repayment terms will all influence which private student loan best suits you.

Once you decide how much funding to apply for and which lenders align with your priorities, you can decide where to apply. You may consider multiple applications to compare the rates and terms you qualify for with different companies. Such applications typically require a hard credit check, so limiting your applications to a short time window can help minimize the impact on your credit score.

Regardless of which loan type you select, use a student loan calculator to estimate the cost of the loans you’re offered. This will likely be a financial commitment for years after graduation, so you’ll want to feel comfortable with the loan product and lender you select.

Bottom line

Federal student loans, with benefits like income-driven repayment and access to forgiveness, should be your first option to pay for college expenses when scholarships and grants aren’t enough. But once you’ve exhausted other options, private student loans can help to provide additional funds, bridging the gap and covering educational expenses.

With many types of private student loan options on the market, you’ll want to research which types you are eligible to borrow. Then compare the interest rates and terms you qualify for, and know that the fine print can vary significantly from lender to lender. Before committing to any student loan, you’ll want to push the numbers and ensure you find the best option for your future finances.