Private student loans
Some students might explore private student loans to cover the cost of their education. Banks and credit unions primarily offer private student loans. These loans typically have higher interest rates than federal student loans, and repayment terms may be less flexible.
How does a student loan work?
When borrowers take out a student loan, they’re borrowing money to pay for their education. The loan amount is based on factors such as financial need, cost of attendance, half-time or full-time enrollment, the degree being pursued and more. The total cost of the loan is typically paid back through monthly payments over a period of years, with interest. Here is a brief overview of how student loans work:
Loan application process
To apply for a federal student loan, you need to fill out the Free Application for Federal Student Aid (FAFSA®). This form determines your eligibility for federal student loans, grants and work-study programs.
Private lenders may have their own application process, which typically involves a check of your credit history and may require a co-signer.
For federal student loans, a borrower’s interest rate depends on the loan type, when it was disbursed and the borrower type (undergraduate, graduate or professional).
For example, the interest rate for an undergraduate Direct Subsidized Loan is 4.99% and for a professional Direct PLUS loan is 7.54%. These rates are for loans issued between July 1, 2022, and June 30, 2023.
Private lenders may offer fixed or variable interest rates, which can change over time. Private loans are credit-based, which means that a borrower’s credit score, income and financial need can play a role in the available interest rates.
Borrowers will start repaying federal student loans after they graduate or drop below half-time enrollment. They receive a repayment plan schedule from their loan servicer that outlines their monthly payments under the standard repayment plan, the due date, the grace period and the length of the repayment period.
Several types of repayment plans are available, including:
- Standard repayment: Fixed monthly payments over 10 years.
- Graduated repayment: Loan payments start low and increase every two years over 10 to 30 years.
- Extended repayment: Stretches payments out over a period of up to 25 years.
- Income-driven repayment: Based on income and family size, with forgiveness after 20 to 25 years.