Private Student Loans: What American Borrowers Must Know

Let’s be real: college is expensive. Even after maxing out scholarships, grants, and federal aid, many of us still face a funding gap. That’s where private student loans come in. They are the market’s answer to those remaining costs, but here’s the critical takeaway right up front: private loans are not your friend like federal loans are. They are a serious financial contract that lacks the safety net you might be used to.

If you’re considering tapping into the private market, stop and read these five mandatory checkpoints first.

1. Private Loans Must Be Your Last Resort

This is the golden rule of student finance. Always, always exhaust federal loans first (like Direct Subsidized and Unsubsidized Loans). Why? Because private lenders just do not provide the strong, transformative borrower protections that federal loans do. We are discussing prospective loan forgiveness schemes including Public Service Loan Forgiveness (PSLF) and Income-Driven Repayment (IDR) plans, which cap your monthly payment based on your wage.

Private loans have none of that. If you lose your job, you’re at the mercy of your lender, who may offer only short, expensive periods of forbearance.

2. The Rate Range is Massive (and Highly Personal)

Federal loan rates are fixed and the same for everyone that year, but private loan rates are a wild west. They currently range from the low 2% marks for the most creditworthy borrowers all the way up to 18% or more.

The rate you get depends almost entirely on your (or your co-signer’s) credit score. A private loan might seem appealing because the lowest advertised rate beats the fixed federal undergraduate rate (which is currently around 6.53% for 2025-2026), but only the best-of-the-best credit profiles qualify for those low rates.

You’ll also need to choose:

• Fixed Rate: Predictable payments for the life of the loan. Always recommended if you can get a competitive rate.
• Variable Rate: Starts lower but can increase or decrease based on market indices (like SOFR). This adds risk, making your monthly payment volatile.

3. You Will Probably Need a Co-signer

Unless you’re a graduate student with a significant credit history and high income, you will likely need a creditworthy adult—usually a parent or guardian—to co-sign your loan.

Because young students seldom have the credit score or stable income to qualify on their own, lenders require a co-signer for undergraduates. Because the co-signer has equal responsibility for the debt, their credit score suffers if you fail to make a payment.

The goal? Find a loan with a co-signer release option. You can petition to have your co-signer released from the obligation once you graduate and demonstrate that you are able to make a certain number of consecutive, on-time principal and interest payments (often 36 months).

4. Limited Repayment Flexibility

Generally speaking, private loans don’t provide generous forbearance or postponement. In fact, a lot of private lenders demand that you begin paying interest—or perhaps the entire principal and interest—while you are still in school.

A private lender may give a few months of forbearance if you experience unemployment or a financial hardship after graduation, but this usually means that the unpaid interest is immediately capitalized (added to your principal balance), increasing the total cost of your loan over time.

5. Check the Fine Print for Fees and Penalties

Private lenders are companies with a wide range of regulations. Prior you signing anything, look for:

Origination Fees: An upfront cost that is subtracted from the principal amount you receive simply for taking out the loan.

Prepayment Penalties: Although they are uncommon in today’s student loans, make sure there are no penalties for making early loan payments. (This penalty is never applied to federal loans.)

Many families must take out private student loans in order to pay for their education, but doing so requires careful consideration. They are not a safety net; rather, they are an instrument for success. Use them sensibly and sparingly!