What Is a Private Student Loan?

Private Student Loans Explained in Less Than 5 Minutes


Private student loans are financial products offered by private institutions such as banks, credit unions, and online finance companies that help college students pay for the expenses of eligible degree programs.

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Definition and Example of a Private Student Loan

Private student loans are loan products offered by private institutions such as banks, credit unions, and online finance companies that help college students pay for the expenses of eligible degree programs. For example, Citizens Bank is a private lender that offers a variety of loan products for higher education, including undergraduate loans, graduate loans, parent loans, and the refinancing of existing student loans.

How Private Student Loans Work

Private student loans work like most other types of loans. You check a lender’s eligibility requirements and apply for the student loan that looks like a good fit. If approved, you will receive a lump sum to pay for your education program and related expenses. You will repay the loan, plus interest, over a set term.

For example, Citizens Bank offers undergraduate student loans up to the total cost of education or the maximum qualified loan amount, whichever is less. The bank offers a range of interest rates that depend on your qualifications, but once you get the loan, your rate is fixed. Repayment lengths range from five to 15 years, and interest-only payments are options for a period while students are in school.

To qualify, you’ll need to meet a few requirements, including being enrolled at least half-time in a degree-granting program at an eligible institution. If you don’t qualify based on your credit, you’ll need a qualified co-signer.

While private student loans may sound like a decent offering, before pursuing them, it’s a good idea to see how much help you can get from the federal government. The U.S. government’s Federal Student Aid department has several grant and loan programs in place with terms and benefits that are hard to beat.

To see if you qualify, fill out the Free Application for Federal Student Aid (FAFSA). If you have leftover expenses, private student loans can help you bridge the gap.

Federal vs. Private Student Loans

Federal student loans offer several advantages over private student loans. In short, private student loans are generally more expensive and come with fewer benefits for the borrower. Here’s a closer look at the differences between the two.


With federal student loans, you often won’t need to worry about making payments until after you graduate, leave school, or drop below half-time enrollment. Conversely, many private student loan lenders require you to make full payments while you’re still in school. Some may allow you to defer payments or will only charge you interest, but it depends on the lender.

Interest Rates

Federal student loans come with low fixed rates that apply to all borrowers and won’t adjust over time. Private lenders may offer fixed or variable interest rates, which will vary depending on your creditworthiness.

Credit Requirements

Private student loans are granted based on a borrower’s creditworthiness, which can make it hard for college students without much credit to get approved without a co-signer. Most federal loans don’t require a credit check or co-signer, with the exception of PLUS loans.

Postponement Options

If, at some point down the road, you have trouble making your payments, federal loans come with options to temporarily postpone or lower your payments. These options may not be offered by private lenders.

Repayment Plans

Federal loans also come with the benefit of very flexible repayment plans, including one that enables you to base your payment amount on your monthly income. Private student loans are usually not as flexible, so you should review the repayment plan options carefully.

Prepayment Penalties

Federal loans don’t charge you a prepayment penalty if you pay off your loan early, while private lenders might.

Loan Forgiveness

Private lenders don’t typically offer loan forgiveness programs. However, federal student loans can be forgiven under certain circumstances, such as if you end up working in public service.

Overall, federal loans are easier to qualify for, they are low cost, and they come with many helpful protections that private lenders just don’t offer in most cases.

If you need financial help for college, start with the FAFSA to see what financial aid you qualify for from the federal government. Once you’ve received your school aid offer, run the numbers to see if you’ll need any additional funds. If so, then it can be helpful to look into the best private student loans available to you to help cover any remaining educational costs.

Key Takeaways

  • Private student loans are term loans offered by private institutions to help pay for the expenses of higher education.
  • Private student loans are often less beneficial for borrowers than federal student loans.
  • It’s best to apply for financial aid with the FAFSA, then turn to private student loans to bridge any gaps.
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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Citizens. “Undergraduate Student Loans.” Accessed Jan. 13, 2022.

  2. Citizens. “Repayments.” Accessed Jan. 13, 2022.

  3. Federal Student Aid. “Federal Versus Private Student Loans.” Accessed Jan. 13, 2022.

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