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Federal student loans are almost always the best way to cover education costs when your savings don't stretch far enough—but private student loans can help when there's a need. Each private lender has different requirements, and their lending terms may vary, but finding the right one might be easier than you think.
Even if you have low credit scores or a thin credit file, you may be able to find a lender to work with you. Here's what you need to know about qualifying for private student loans.
Who Is Eligible for a Private Student Loan?
As with any type of loan, private student loan lenders are careful when it comes to who they'll lend money to. Here the main factors they'll look at when deciding whether to approve your loan application:
- Credit score and credit history: There's no set credit score you need to qualify, but the better your credit scores are, the more likely you are to get approved. Good credit also helps you qualify for lower interest rates. If your credit is poor, consider applying with a cosigner. You can also review your credit report and look for ways to improve your credit before applying.
- Income and debt: Even if you're not earning much, having a source of income can help you qualify. Lenders may also look at your debt-to-income ratio (DTI). This ratio compares your income with the amount you owe toward your debts each month. A lower DTI will help you qualify for better loans.
- Enrollment in a qualified educational program: Before approving your loan, the lender may contact your school to verify your enrollment. They may even check to make sure you're not borrowing more than you need for tuition and other education expenses. You may have to be enrolled full time to qualify for a private loan, and the lender may not approve all types of colleges and degree programs.
How Private Student Loans and Federal Student Loans Differ
While there are many types of student loans, each can be categorized in one of two ways: private or federal. There are important differences between federal and private student loans, including how you qualify.
Federal Student Loans
Federal student loans are funded by the U.S. Department of Education. There are many types of federal loans, and each has requirements, limits and stipulations you should be aware of before you apply. Unlike private student loans, your credit isn't a factor (unless you're seeking a parent PLUS loan), but you will likely have to share information about your family income and financial needs.
Student loans through the federal government generally charge less in interest and fees than loans from private lenders. On most types of federal student loans, that interest won't kick until after you've graduated, and you won't have to make payments at all while you're in school.
Another big benefit of borrowing from the federal government is that you'll be able to access payment flexibility programs if you ever have trouble making loan payments. You may have more time to repay federal loans or even be able to reduce or delay your payments based on your income. Some borrowers may also qualify for forgiveness on some or all of their student loan debt.
Private Student Loans
If federal student loans don't fully cover your education bill, you might consider borrowing the rest from a private lender. Private lenders tend to offer larger loan amounts and have fewer restrictions on how you use the money. But that flexibility comes at a cost.
Private loans can be expensive and may pose some risks to borrowers, so it's best to exhaust your options—including federal loans, grants and scholarships—before applying for a private loan.
Interest rates are usually higher for private student loans. Your rates may be variable, too, meaning your interest rate could increase significantly at some point. Higher interest rates mean bigger monthly payments and a higher total cost to your loan repayment.
You'll also be charged interest on your private student loans while you're in school, and you may even have to start making payments before you graduate.
Where Can You Get a Private Student Loan?
Many lenders offer private student loans, including banks, credit unions, schools and online lenders. Loan terms, the amount you can borrow and qualifying uses for the money can vary greatly from one lender to the next, so make sure to compare multiple lenders before applying. Here are a few places to search:
- Online lenders: You can use search tools like Experian Credit Match™ to quickly compare loan offerings all in one place.
- Your school: Contact your school's financial aid office to find out what loans the school offers directly and if there are any state agency loans available. You can also ask if the school has a list of lenders who work with them.
- Your bank or credit union: The financial institution you already do your banking with may offer low-rate student loans. Many banks and credit unions also offer discounts to qualified customers.
When you're ready to begin applying, you can submit applications through most lenders' websites. Be prepared to share the following details as part of your application:
- Your degree or program
- The school you'll be or are attending
- How much money you need to borrow
- Your basic personal and financial information
- Your cosigner's information, if you're applying with one
How Can Private Student Loans Affect Your Credit?
Private student loans impact your credit in several ways. Applying for a loan can cause a hard inquiry to appear on your credit report, which may have a negative but temporary impact on your credit scores. One way to reduce that negative impact is to get prequalified before you apply. When you prequalify, the lender gives an estimate of the loan terms you're likely to qualify for, including the amount you may be able to borrow.
Once you take out a student loan, your new debt will further impact your credit reports and scores. If you miss a payment, your scores will drop, and late student loan payments will stay on your reports for seven years. On the other hand, paying your student loan on time every month can help you build a strong credit profile.
The amount owed on your loan is another factor that affects your scores. Unpaid debt can reduce your scores, even if payments aren't due yet. Paying down the balance over time will help you improve your scores and build up a good credit history.
Carefully Consider Your Options
There is no set credit score that qualifies you for a private student loan. Even with good credit, private student loans can be costly. The safest and most cost-effective way to fund your education is to apply for federal loans, scholarships and grants.
If you need additional funds, shop for a private student loan carefully. Start by reviewing your free credit report to look for ways it can be improved. Then you can compare prequalification offers from multiple lenders to find the best deal. If you still have trouble getting prequalified, or your prequalification offers are less than ideal, consider applying with a cosigner.