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College Students and Recent Grads

The Ultimate Guide to Student Loans in 2019

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Student loans are loans that you take out to help pay for educational expenses, such as tuition, fees, room, board, equipment and transportation to and from school. This guide covers the ins and outs of federal and private student loans, explains how to apply for student loans, discusses which option may be best for your circumstances and offers several alternatives to borrowing money.

PART I: Understanding student loans

As with other types of debt, you must agree to repay the money, plus interest.

However, student loans can differ from other types of loans. They may have less stringent credit or income requirements for students, and you may be able to delay making payments until after you leave school.

How do student loans work?

You can apply for a student loan from the federal government or from a private lender. The eligibility requirements and application process (discussed in detail later) are different for federal and private student loans, but the overall student loan process can be similar.

After applying and getting approved for a student loan, the lender will often send the money directly to your school. The school applies the money to your account to pay for tuition, fees and other expenses. If there’s money left over, the school will issue you a refund which you can use for additional educational expenses, such as off-campus housing and food. You can also return the excess funds.

With federal loans, you’ll need to reapply for financial aid once every year to remain eligible; the policies of private lenders vary. You may need to reapply each term, apply once for an academic year or apply once and fund multiple years. However, with both federal and private student loans, the loan will generally be split up and disbursed (i.e. sent) to the school at the beginning of each term.

Terms and repayment options

Your repayment term — the amount of time you have to repay the loan — and repayment plans can vary depending on the type of student loan. Many student loans, including federal student loans, let you defer payments while you’re enrolled at least half time in an eligible program, as well as during a six-month grace period after you graduate, leave school or drop below a half-time schedule. However, some private lenders require borrowers to make at least interest-only or $25 monthly payments once the loan is disbursed.

Federal student loans automatically enter a 10-year standard repayment plan. However, you can switch to a different loan repayment plan for free. Other repayment plans may give you more time to repay your loans, which can decrease your monthly payments but lead to paying more interest over the loan’s lifetime.

You may also be eligible for an income-driven plan that bases your monthly payments on your income, family size and where you live. An income-driven plan could even lead to $0 monthly payments, and the remainder of your loan balance might be forgiven after you make monthly payments for 20 to 25 years. There are also federal student loan forgiveness and cancellation programs.

Private loans aren’t eligible for federal repayment, forgiveness or cancellation programs, and often you’ll choose your loan’s term or be assigned a term when you apply. Some lenders have different repayment plans, but with others the only way to change your private loan’s term is to refinance the student loan.

Interest rates

The interest rate on your student loan can impact your overall cost of borrowing and your monthly payment amount. It’s important to understand how a lender determines your interest rate, how interest accrues on your loan and what your options are before agreeing to take out a student loan.

Congress sets the interest rate on federal student loans. All federal student loans have a fixed interest rate, meaning the rate won’t change once the loan is disbursed.

By contrast, private student loans’ interest rates can vary greatly. Lenders may offer different rate ranges, and the rate you receive will depend on your creditworthiness (or the credit of your cosigner). Private lenders also offer fixed- and variable-rate loans. Variable-rate loans are riskier because the interest rate can change in the future, but they can be enticing because they often offer a lower initial interest rate than fixed-rate loans.

Many federal and private student loans begin accruing interest as soon as the loan is disbursed. The interest will continue to accrue while your loans are in deferment or in a grace period, and then it will be added to your loan’s principal balance (i.e. capitalized) once you enter repayment. When this happens, more interest may accrue each month, as your interest rate will now apply to a higher principal loan balance.

PART II: Types of student loans

Student loans fall into one of two general categories: federal or private student loans.

Federal student loans

Federal student loans can offer borrowers simplicity and savings compared with private student loans. Although there are differences depending on the type of federal student loan or the degree the borrower is pursuing, federal student loans have uniform eligibility requirements, interest rates, loan terms, benefits and repayment options for every borrower.

Private student loans

On the other hand, private student loans — and their eligibility requirements, interest rates, loan terms, benefits and drawbacks — can vary depending on the lender. Carefully research different companies’ policies and the fine print on their loan agreements before agreeing to take out a loan.

Often, federal student loans are the best first choice for borrowers because of their standard terms and low barrier to entry. Even if you could get a lower rate with a private student loan, flexible repayment options, deferment and forbearance programs and eligibility for federal forgiveness can make federal loans a better option. Private lenders may not offer or guarantee similar options.

PART III: Federal student loan options

What is a federal student loan?

A federal student loan is a loan that’s funded by the federal government. There are currently three types of federal student loans available to new borrowers through the William D. Ford Federal Direct Loan Program: direct subsidized loans, direct unsubsidized loans and direct PLUS loans.

There are also direct consolidation loans, which allow borrowers to combine multiple federal student loans. Previous borrowers may also be repaying other federal student loans that are no longer available to new borrowers.

All three types of federal student loans have the same basic eligibility requirements, including being enrolled at least half time or accepted into an eligible degree or certificate program. In addition, the application process always starts with the Free Application for Federal Student Aid (FAFSA).

However, these loans are not identical. They may have different annual loan limits, aggregate loan limits and credit requirements. Loan details, such as eligibility for different repayment plans, can also vary depending on the borrower — whether they are an undergraduate, graduate or professional student, or the parent of a student.

The loans may have different interest rates and disbursement fees, a fee that’s subtracted from the amount that’s sent to your school. These fees depend on the loan type, the type of borrower and when the loan is disbursed.

The federal student loan interest rates in this guide are for federal loans disbursed from July 1, 2018 to June 30, 2019. The disbursement fees apply to federal student loans disbursed from Oct. 1, 2018 to Sept. 30, 2019.

Direct subsidized loan

 

Interest rate

Disbursement fee

Annual loan limit

Aggregate loan limit

Credit needed

Direct subsidized loans

5.05%

1.062%

$3,500 first year
$4,500 second year
$5,500 third and subsequent year

$23,000

None

How does it work?Direct subsidized loans are only available to undergraduate students, and only if their school determines they have a financial need based on the school’s cost of attendance and their expected family contribution. The direct subsidized loan limit increases during your second and third years. However, your offer could decrease if your financial need decreases.

The subsidy part comes into play after your loan is disbursed. Although the loan starts to accrue interest right away, the U.S. Department of Education will pay the interest while you’re in school at least half-time, during your grace period and if you later put the loan into deferment.

Pros and cons. If you plan to take out a federal student loan, the direct subsidized loan’s relatively low disbursement fee and interest rate, as well as the interest subsidization makes it the best option in most cases. Of course, it’s only an option if you qualify — the biggest drawback is that you may not be able to borrow enough to pay for all your educational expenses.

Direct unsubsidized loan

 

Interest rate

Disbursement fee

Annual loan limit

Aggregate loan limit

Credit needed

For dependent undergraduate students

5.05%

1.062%

$5,500 first year
$6,500 second year
$7,500 third and subsequent years

The annual loan limits include Direct Subsidized Loans.

$31,000, including up to $23,000 in Direct Subsidized Loans.

None

For independent undergrads and dependent undergrads after a parent gets denied for a PLUS Loan

5.05%

1.062%

$9,500 first year
$10,500 second year
$12,500 third and subsequent years

The annual loan limits include Direct Subsidized Loans.

$57,500, including up to $23,000 in Direct Subsidized Loans.

None

For graduate and professional students

6.6%

1.062%

$20,500

$138,500, including up to $65,500 in Direct Subsidized Loans.

None

How does it work? Undergraduate and graduate students may be able to borrow money with direct unsubsidized loans, even if they don’t have a demonstrated financial need. The loans also have higher annual and aggregate loan limits than direct subsidized loans, and the limit varies depending on your degree type and dependency status.

However, the loan limits include debt from both Direct Subsidized Loans and direct unsubsidized loans loans. You also might not be offered the maximum amount, as your offer depends on several factors — these can include your school’s cost of attendance, your family’s expected contribution and how much money you’ve received from other sources of financial aid, such as scholarships.

Pros and cons. The higher loan limits and lack of a financial need requirement may make it easier to qualify for a direct unsubsidized loan; for undergraduate students, these loans have the same interest rate and disbursement fee as the subsidized version. However, the biggest drawback may be the lack of the subsidy. Without the subsidy, you could leave school with significantly more debt than you initially borrowed, unless you make interest payments while you’re in school and during the grace period.

For graduate and professional students who aren’t eligible for direct subsidized loans, the direct unsubsidized loans offer a lower interest rate and disbursement fee than grad PLUS loans. However, graduate and professional students may have already established their creditworthiness, and so they might be able to save money with a private student loan.

Parent PLUS loan

 

Interest rate

Disbursement fee

Annual loan limit

Aggregate loan limit

Credit needed

Parent PLUS loan

7.6%

4.248%

Your child's cost of attendance minus other financial aid

No limit

No adverse credit history

How does it work? Parent PLUS loans are direct PLUS loans that a parent borrows to help a dependent child pay for school. Parent borrowers must meet many of the same basic eligibility requirements as student borrowers; however, parent PLUS loans also require a credit check. The credit check looks for an adverse credit history in your credit reports, such as a recent bankruptcy or outstanding delinquent debts.

If you don’t pass the credit check, you may still be able to take out a parent PLUS loan if you have a creditworthy endorser (i.e. cosigner) or appeal the decision. Your child may also be able to take out additional direct unsubsidized loans if you’re unable to qualify for a parent PLUS loan.

Loan payments begin immediately after the parent PLUS loan is disbursed, unless parents request a deferment. If you request a deferment, you may not have to make payments as long as your child is enrolled at least half time and for the six months after they leave school or begin taking a less-than-half-time schedule. However, interest will accrue during the deferral period.

Pros and cons. As with other federal student loans, parent PLUS loans are eligible for different federal repayment plans, and forgiveness and cancellation programs. However, parent PLUS loans are only eligible for one of the four income-driven plans: the income-contingent plan — notably, this is only an option after the parent PLUS loan is consolidated with a direct consolidation loan.

Direct PLUS loans, including parent PLUS loans, also have the highest interest rate and disbursement fee of the federal student loans. The interest rate and fees may still be lower than what you could receive with a private student loan, but you should compare your options.

Another potential con is that parents can’t transfer the loan to their children, although a child may be able to take over the debt if they can qualify to refinance student loans with a private lender. The debt from the parent PLUS loan could also increase your debt-to-income ratio, which may affect your eligibility for other loans or financial products.

Grad PLUS loan

 

Interest rate

Disbursement fee

Annual loan limit

Aggregate loan limit

Credit needed

Grad PLUS loan

7.6%

4.248%

Your cost of attendance minus other financial aid

No limit

No adverse credit history

How does it work? Graduate and professional students can use grad PLUS loans to pay for educational expenses. They have the same fees, limits and credit-check requirements as parent PLUS loans (both loans are direct PLUS loans), but there are a few differences.

Grad PLUS loans are eligible for all four income-driven repayment plans, and unlike parent PLUS loans, grad PLUS loans are automatically placed into deferment until six months after you drop below a half-time schedule, graduate or leave school. However, you can make early payments if you want.

Pros and cons. Grad PLUS loans don’t have preset annual or aggregate loan limits; you can also borrow up to your school’s cost of attendance, minus your other financial aid awards. This means you may be able to fund all your educational costs with grad PLUS loans — but that doesn’t mean a grad PLUS loan should necessarily be your first choice.

Direct unsubsidized loans will have a lower interest rate and disbursement fee than grad PLUS loans, and they offer the same access to federal repayment plans and programs. You may also want to compare private student loans offers to your grad PLUS loan rates to determine which will save you the most money.

If you want the best of both worlds — greater federal loan protections but lower private loan rates — keep in mind that you could always refinance your student loans down the road. You might borrow PLUS loan for its safeguards but decide later that they’re worth trading for a lower APR as you ramp up your repayment.

PART IV: Private student loans

What is a private student loan?

A private student loan is an educational loan issued by a non-government lender. As with federal student loans, borrowers must use the money for educational expenses.

Some federal laws apply to both federal and private student loans. For example, lenders aren’t allowed to charge you a fee for paying off your loans early — however, it can be difficult to discharge a federal or private student loan during a bankruptcy.

There are also important differences between federal and private student loans, and several pros and cons to consider before taking out a private student loan.

Pros:

  • High loan limits. The federal student loans with the lowest interest rates also have preset annual and aggregate loan limits. By contrast, private student lenders may let you borrow up to your school’s cost of attendance.
  • Potentially lower interest rates. Creditworthy borrowers may qualify for a lower interest rate with a private lender than with a federal student loan.
  • No funding fee. Federal student loans often have a disbursement fee; private student lenders generally don’t charge a disbursement or origination fee.
  • Variable-rate options. Private lenders may offer variable-rate loans. Currently, many of these start with a lower interest rate than fixed-rate loans, but there’s a risk the rate will increase in the future.
  • Interest rate discounts. Federal and private student loans often offer a 0.25% interest rate discount if you sign up for autopay. Private lenders may offer additional discount opportunities.

Cons:

  • Credit requirements. Your income, credit score and other factors could impact your eligibility, interest rate and maximum loan amount.
  • No access to federal benefits or programs. Private student loans aren’t eligible for federal repayment plans or subsidies. They also aren’t eligible for the government’s forgiveness, cancellation, discharge, forbearance or deferment programs.
  • Fewer hardship options. Private lenders might not offer borrowers forbearance or deferment options when borrowers have trouble making payments.
  • Quicker defaults. Private student loans may default sooner than federal student loans if you stop making payments. When a loan defaults, you’ll immediately owe the entire loan balance. Federal student loans also offer ways to get your loan out of default and back onto a repayment plan, but private lenders may not give you similar options.
  • Limitations with loan repayment assistance programs. Some government and private student loan repayment assistance programs won’t help you repay private student loans.
  • Varied discharge policies. Private lenders may not discharge your loan balance if you become permanently and totally disabled or die. As a result, you may leave your estate or cosigner with a loan balance to pay. Federal student loans can be discharged when the borrower, or student in the case of parent PLUS loans, is permanently and totally disabled or dies.

Where can you find private student loans?

Banks, credit unions, online lenders, schools and states all offer private student loans to students, and sometimes to students’ parents. Your school’s financial aid office may be able to recommend several options, but you can also look online or speak to friends and family members to get recommendations.

There’s no single best private student lender, and you should compare different lenders’ loan types, loan terms, repayment options, fees, discounts and fine-print restrictions, like if they let you release a cosigner. You could also read reviews and recommendations to determine which private student lenders might be best for your situation.

Once you’ve narrowed down your list, you can then apply for a student loan with several lenders and compare your offers to determine which loan is best.

Who are private student loans best for?

Federal student loans are the best place to start for most borrowers, but there are some students who may want or need to take out private student loans. For example, if you’ve reached your annual or aggregate loan limit with federal student loans and you still need more money for school, you may want to consider a private student loan.

Parents and graduate or professional students who have established their creditworthiness may also want to consider private student loans as an alternative to federal student loans. Their federal loans have a higher interest rate and disbursement fee than those for undergraduates, and older applicants may be able to qualify for a lower interest rate with a private lender. However, consider the big picture as there may be other drawbacks, such as lack of access to federal forgiveness programs and repayment plans.

Finally, private loans could be a last resort for students who aren’t eligible for federal financial aid. This cohort includes part-time and international or immigrant students.

PART V: How to get a student loan

Applying for federal student loans

You must complete and submit a Free Application for Federal Student Aid (FAFSA) every year to apply for and remain eligible for federal financial aid.

MagnifyMoney has a detailed guide on filling out the FAFSA. You can also find a PDF guide from the Education Department and free phone support at 1-800-4-FED-AID (1-800-433-3243).

Submitting your FAFSA early can help your financial aid situation, as some schools and states offer financial aid on a first-come, first-served basis based on information in your FAFSA. Even if you don’t plan on taking out loans, the FAFSA is a requirement for some grant and scholarship opportunities.

To begin the FAFSA process online, go to fsaid.ed.gov and create your FSA ID. The FSA ID will be your username and password for signing into your account and you’ll also use it to sign loan documents. Dependent students also need a parent to create an FSA ID, which the parent will use to sign the child’s FAFSA.

After you’ve created your FSA ID, you can start the online application at fafsa.gov. To complete the application, you’ll need:

  • Your Social Security number or alien registration number
  • Income-related forms, including recent W-2s and federal income tax returns
  • Copies of your bank, brokerage and other financial account statements
  • Documents related to other income
  • If you’re a dependent student or you’re married, you may also need your parents’ or spouse’s Social Security number and income-related forms.

It generally takes under an hour to complete the FAFSA. Returning students will send the form to their school, while first-year students can send their FAFSA to the schools they’re considering.

After submitting your FAFSA, you will get a Student Aid Report (SAR) by mail or email; you should review this document to ensure all your information is correct. The SAR will list your expected family contribution amount, along with your FAFSA information. Schools and state agencies use this data to determine your financial aid eligibility and award amounts, and a mistake could lead to less aid being offered.

Your school, or the schools you’re considering, will then send you an aid offer that lists the financial aid types and amounts that you can accept. Your aid package may include a combination of grants, scholarships, work-study funds and/or several types of student loans.

You can choose which aid package offer to accept and how much money to borrow if you’re taking out a loan; the process can vary depending on your school. If you’re accepting a federal student loan offer, you will have to sign a promissory note, or loan contract. Keep in mind that you do not have to accept the full amount of federal loans you’re eligible to borrow — do the math to avoid unnecessary debt.

Applying for private student loans

Private student lenders may have different applications, and the application processes could vary. However, you can find some lenders that have a fairly simple and straightforward online application.

You won’t need to complete the FAFSA to apply for a private student loan, but you may want to gather similar personal and financial documents — you’ll likely need information from these documents during the application process, and you might have to submit copies for verification purposes.

You may also need personal and financial information from a cosigner if you’re adding one to your application; in some instances, the cosigner may be able to log in and submit their information directly.

If your application is approved, you might be able to pick from several loan terms with varying interest rates. Or, the lender may make you an offer and you can choose to accept or decline it.

At some point during the application process, the lender could contact your school to verify your eligibility and the school’s cost of attendance, which can determine your maximum loan limit. Alternatively, you could be asked to self-certify these numbers.

Alternatives to student loans

A loan shouldn’t necessarily be your first choice when it comes to financial aid. Scholarships and grants can offer money for school that you don’t need to pay back. Graduate or professional students may be able to get “free” money via fellowships. And you could look into different work opportunities.

If you submitted a FAFSA, you may receive a work-study award as part of your financial aid offer. The federal work-study program pays a portion of work-study recipient’s wages, which could make it easier for you to find a job while you’re at school. However, only certain employers are eligible, such as the school, nonprofits and some for-profits if the work you’ll do aligns with your major.

Graduate and professional students may have opportunities to get an assistantship at the school. Depending on the program, you could receive a stipend, tuition waivers or even benefits in exchange for working part time.

You can also look for work opportunities that aren’t part of a financial aid program. A part-time job while you’re at school, or a full-time job during the summer, might not earn you enough to cover all your educational costs — but every dollar you earn and put toward your education is one less dollar you need to borrow (and pay interest on).

If working an in-school job isn’t feasible, you could also avoid borrowing by using an Income-Share Agreement (ISA). Available at schools and through private companies, ISAs help you cover your tuition in exchange for a percentage of your income when you leave school and find employment. Of course, consider ISAs or student loans only after racking up as much gift aid and savings as you can.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Louis DeNicola
Louis DeNicola |

Louis DeNicola is a writer at MagnifyMoney. You can email Louis at [email protected]

Andrew Pentis
Andrew Pentis |

Andrew Pentis is a writer at MagnifyMoney. You can email Andrew here

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College Students and Recent Grads

Step-by-Step Guide to Applying for Private Student Loans

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

istock

Once you’ve maxed out your eligibility for federal financial aid, you might turn to private student loans to cover the costs of college. But you’ll soon discover that applying for private student loans is a different process than applying for federal ones.

To access private loans, you’ll need to seek out a bank, credit union or another financial institution. Along with all the required paperwork, you might also need a cosigner to sign on to your application. Learning how to apply for private student loans before you act will help ensure there are no delays along the way.

Applying for private student loans in 7 steps

1. Determine how much money you need to borrow

Your first step to getting a private student loan involves figuring out how much money you need to borrow. Private loans can be used for any eligible educational expenses, including tuition, fees, textbooks, room and board and other living expenses.

Take a look at your school’s estimated cost of attendance, which you can typically find on its financial aid website or your financial aid letter. Take the amount listed and subtract any other aid you’ve already received, like federal student loans, grants or scholarships.

If you haven’t received aid yet, the FAFSA4Caster tool can help you estimate your award. After submitting the Free Application for Federal Student Aid (FAFSA), you’ll also see your Expected Family Contribution (EFC), or the amount your family is expected to pay out of pocket.

If you still have a gap in funding after aid has been applied, you might fill it with a private student loan. But be careful about borrowing too much — you don’t want to be stuck with a burdensome amount of debt after you graduate.

What’s more, you probably can’t borrow much beyond your school’s cost of attendance anyway, since your school will likely have to certify any amount you request from a private lender. Estimating your costs will give you a good sense of how much you’re eligible to take from a bank.

From there, you can look for ways to lower the amount you need to borrow in student loans, whether that involves applying for more scholarships or working a part-time job during college.

2. Research private lenders

Once you have a sense of how much you want to borrow in private student loans, it’s time to research your options. You have lots of choices when it comes to borrowing a private student loan.

To save you some time, we’ve vetted private student loan lenders to help you find some of the best ones. Here are a few of our top recommendations for lenders with excellent rates and terms.

Since each lender is different, it’s useful to compare your options to find one that’s best for you. Along with finding the lowest interest rate, you might also look for other perks, such as flexible repayment options or a reputation for good customer service.

3. Compare private student loan offers

Another advantage to several of the lenders mentioned above is their offer of an instant rate quote. After heading to their website, you can check the rates available to you with just a few pieces of basic information, such as your name, school, and the amount you wish to borrow.

At this point, you can immediately see some pre-qualification offers, along with the rates you might get if you apply. This instant rate quote makes it easy to compare offers from multiple lenders so you can find one with the best terms.

Plus, it won’t impact your credit at all, since it’s just a soft credit check. Remember, however, these are only pre-qualification offers — you’ll need to submit a full offer and consent to a hard credit check to see your final loan offer.

But these pre-qualification quotes do give you a good sense of what you could be eligible for, as well as help you narrow down your options for lenders. Note that not every lender offers an instant rate quote, and you probably shouldn’t neglect the ones that don’t.

If you belong to a bank or credit union, for instance, it could be worth speaking with them about a loan to see if you can get an even better deal. Still, taking advantage of instant rate quote or loan comparison marketplaces such as LendKey will help you get an initial sense of what’s available.

4. Find a cosigner if necessary

Unlike the federal government, private lenders have underwriting requirements for credit and income. You’ll need strong credit and a steady income to qualify for a loan, as this reassures the lender you’ll be able to pay back your debt.

Most undergraduates can’t qualify on their own, so they apply with a cosigner, such as a parent. However, know that your cosigner becomes just as responsible for the debt as you are — their credit is on the line in the event you can’t pay, so have a conversation with your cosigner before applying for private student loans to ensure you’re both on the same page about who’s paying back the debt.

Cosigning debt isn’t a decision that should be made lightly. It’s important to clarify expectations so no one’s finances (or relationships) get hurt.

5. Gather the required paperwork

Once you’ve done the preliminary research, the time has come to collect all the necessary documentation. If you’ve submitted the FAFSA, you might already have some of this information on hand.

Although requirements can vary, most private lenders ask for the following:

  • Social Security numbers for you and your cosigner (if any)
  • Personal data, such as your date of birth, home address and phone number
  • Annual income, with pay stubs or W-2s as supporting documentation
  • Employment information
  • A copy of the previous year’s tax returns
  • Monthly rent or mortgage payments
  • A list of assets and their values
  • Contact information for a personal reference
  • The Private Education Loan Applicant Self-Certification form, which you can obtain from you school’s financial aid office or the Department of Education

Each lender sets its own requirements, but the majority will want most of the documents on this list. Gathering them in advance will help your application go smoothly.

6. Submit your application for a private student loan

Once you’ve done your research, chosen a lender and gathered your information, the time has come to submit your private student loan application. Most lenders make it easy to apply for a private student loan online.

This process shouldn’t take long, especially once you have all the relevant documents at the ready. You’ll usually start by filling out your personal information, as well as the details for any cosigner. You’ll have to indicate where you’ll be attending school, as well as the loan amount you’re requesting, and likely upload verifying documents, such as pay stubs or tax returns.

Your final step will be acknowledging the lender’s terms and conditions before hitting submit. At this point, most lenders will reach out to your school to certify the amount you requested.

Assuming all goes well, the lender will likely send the funds to your financial aid office. After applying it to your tuition bill, your financial aid office will return any remaining funds to you.

You can use this money on living expenses, or you can return it to the bank so you don’t have to pay interest on it. In fact, you can always prepay your student loan ahead of schedule without penalty.

Note that some lenders will send the funds directly to you, rather than to your financial aid office. In this case, it’s your responsibility to get the loan money and pay your tuition bill.

While you can borrow a private student loan at any time throughout the school year, don’t leave your application until the last minute. The process can take some time, so you want to ensure the money arrives in time to pay your tuition bill before the deadline.

7. Read over the terms of your contract before signing

Once your application has been submitted and approved, make sure to read over your student loan contract before you sign it. Check to see exactly how much you’re borrowing, along with your repayment term, interest rate and monthly payment.

Find out if you need to make any payments while you’re still in school, or if you have a grace period that extends for a few months after you graduate. Use our student loan calculator so you have a clear understanding of the long-term costs of your loan.

Finally, find out if your lender offers any alternative repayment options in the event you lose your job or return to school in the future. For instance, some lenders will postpone payments temporarily if you run into financial hardship or go to graduate school.

Learn about your options beforehand so you don’t make any false assumptions about your private student loan options.

Applying for private student loans doesn’t have to be arduous

Applying for a private student loan might feel daunting when you’re heading to college the first time, but the process will seem easier after you’ve gone through it once. Learn how to get private student loans well before the school year starts, so you won’t be left scrambling when tuition is due.

And make sure you shop around with multiple lenders before choosing one to finance your education. By putting in your due diligence now, you can find a private student loan with the best rate and lowest costs of borrowing.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Rebecca Safier
Rebecca Safier |

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College Students and Recent Grads

Can You Transfer Private Student Loans To Federal Loans?

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You might have heard all the buzz about federal student loans being refinanced at lower interest rates by private lenders. That could leave you wondering whether you can accomplish the opposite and transfer private student loans to federal loans.

This would be a great option, since consolidating private student loans to federal debt would allow you to score government-exclusive protections like special repayment plans and forgiveness options. But unfortunately, transitioning loan types only works in one direction.

Still, there are other alternatives to make your private student loan repayment easier, as we’ll discuss below.

Can you transfer private student loans to federal debt?

Private student loans are borrowed from banks, credit unions and online lenders. They’re awarded based on your (cosigner’s) credit history and include perks like potentially lower rates, more repayment term options and, often, better customer service.

Unfortunately, they’re missing one key feature: There’s no way to consolidate private student loans into federal education debt. Once your debt is private, it stays that way.

On the other hand, it is possible to combine your debt into a single loan. Both federal loan consolidation and private refinancing allow you to do this and pay just one monthly bill. But there are significant differences between the strategies, starting with loan eligibility.

 Direct loan consolidationRefinancing
Eligible loansFederalPrivate or federal
LenderDepartment of EducationBank, credit union or online lender
PurposeGroup federal debt at its average interest rate, rounded to the nearest ⅛ of 1% (fixed rates only)Group education debt at an interest rate awarded based on your creditworthiness (fixed or variable rates)
Key benefitsKeep federal loan protections, including income-driven repayment, forbearance/deferment and pathways to loan forgivenessReduce your interest rate to save money, shorten or lengthen your repayment term, and switch lenders
Key costsExtending your repayment would allow more interest to accrue over time, and it could reset the progress you’ve made toward certain loan forgiveness programsYielding the protections (like income-driven repayment) on any federal loans you elect to refinance

So, no, you can’t transfer private student loans to federal loans. You could either consolidate your federal loans into a direct consolidation loan with the Department of Education, or you could consolidate your federal and private loans via refinancing.

The best alternative to consolidating private student loans to federal debt

If you were hoping to consolidate private student loans to federal, consider the next best option: Finding a private lender whose product mimics what you like about federal loans.

No private lender will match every aspect of a federal loan. You won’t find subsidized loans (where some of the interest is paid for you), student loan forgiveness or the ability to switch repayment plans for free and at a moment’s notice. Those options only come from Uncle Sam.

However, there are plenty of federal loan-like features available at banks, credit unions and online lenders, including:

  • Fixed interest rates: Your rate will stay the same for the life of the loan
  • Six-month grace period: Smaller payments or no payment for six months after you leave school
  • In-school deferment: Smaller payments or no payment while you’re in school, usually at least half time
  • Autopay rate reductions: Often a 0.25% discount on your interest in exchange for setting up automatic payments
  • Economic hardship forbearance: Possible pause on repayment if you suffer a hardship such as losing your job
  • Tax-deductible student loan interest: As with federal loans, you can write off the interest paid on your student loan

You might even find an income-driven option in the private marketplace, setting your payment at a fixed percentage of your disposable income. The Rhode Island Student Loan Authority and industry major SoFi make a form of income-driven repayment available to its borrowers — but only in cases of financial hardship.

What to know about student loan refinancing

Because student loan refinancing allows you to potentially lower your interest rate, the eligibility requirements aren’t forgiving.

Typically, you need good-to-excellent credit and a stable source of income — or a cosigner who enjoys both. It also helps to have made full and prompt payments on your loans.

Even if your application is strong enough to gain approval, it might not qualify you for the low end of lenders’ advertised interest-rate ranges. If you need a credit score of 650 to be eligible at Earnest, for example, you’ll likely need a score 100 or more points higher to access the best of its rate offerings.

A lower interest rate makes all the difference. Say you currently have a 9.00% rate on $20,000 worth of private student loans to be repaid over the next decade. Refinancing that five-figure debt to a 5.00% rate would save you nearly $5,000 in interest over 10 years, according to our student loan refinancing calculator.

Still, a reduced rate isn’t the only factor that should nudge you toward refinancing — especially if you’re privatizing your federal loan debt, too. Refinancing is irreversible and would strip your federal debt of its government-exclusive protections.

On the other hand, note some of the advantages a refinanced loan might have over federal debt, such as:

  • Option to apply with a creditworthy cosigner
  • Ability to choose fixed, variable and hybrid interest rates
  • Access to a wider choice of repayment terms, often between five and 20 years

Consider whether student loan refinancing is right for you

Not being able to transfer private student loans to federal debt shouldn’t feel like the end of the world.

After all, at least you retain the option to transition your debt in the other direction — moving your federal (and private) loans to a bank, credit union or online lender that offers low rates or other attractive terms.

While not suitable for every borrower, student loan refinancing gives you the power to press reset and charge forward on your repayment. To gauge its usefulness for your situation, explore the pros and cons of refinancing.

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Andrew Pentis
Andrew Pentis |

Andrew Pentis is a writer at MagnifyMoney. You can email Andrew here

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