4 Reasons Why Students Borrow Private Student Loans

why students borrow private student loans

Going to college is a very exciting journey that can expose one to career opportunities they might not be able to get otherwise. 

Paying for college costs, however, can be challenging, and students might need to borrow money to fill their financial gaps. 

That’s why federal student loans and Income Share Agreements exist. But these financial aid options limit the amount of money a student can borrow in a school year so there might still be financial gaps that need to be filled. 

Borrowing private student loans is a great way to cover any gaps so that students can attend the school of their choice without stress. 

In this piece, we’ll go over what a private student loan is, why students borrow private student loans and how to know if you’re eligible for a private student loan. 

Let’s dive in.

What are private student loans?

Like federal student loans, private student loans can be used to pay for college fees. The difference is that federal student loans are provided by the government, while private student loans are designated by traditional banks, credit unions or independent lenders. 

Private loans are best used when a student has maxxed out their federal loan. 

Each organization that issues private student loans has different requirements, interest rates and repayment terms. You can apply for a private student loan and use the funds to cover any school-related expenses, including tuition, computers, books, living expenses, and transportation. 

Why do students borrow private student loans?

There are many different reasons why students forgo federal loans and opt for private student loans. Here are some of them: 

They have exceeded borrowing limits and other options 

If you have exhausted other financial options including federal financial aid, Income Share Agreements, scholarships, and grants, and you still have money left to pay, then students may consider borrowing private student loans. 

Federal student loans have a limit to how much money students can get. That limit is currently $31,000 for undergraduate students who depend on their parents. Now, the average tuition fee at a public, in-state college is about $10,000 per year. So a regular four-year course would cost $40,000 in tuition fees, which is more than the limit for federal loans.

This amount is just a small fraction of the normal tuition cost of public out-of-state and private universities. This financial gap also means that students who attend more expensive schools likely need to borrow private student loans when their federal loan options run out. 

They’re not eligible for federal student loans 

Some students are not eligible for federal loans.

Federal Student Aid has some specific requirements that students must meet before they are able to get federal loans. While many college students meet these guidelines, not all of them do. For instance, students that are not U.S. citizens, permanent residents in the U.S. or eligible non-citizens cannot borrow federal student loans. 

In addition, students with grades less than 2.0 GPA on a 4.0 scale that are not making satisfactory academic progress can lose their financial aid eligibility. Students who fail to register with Selective Service before the age of 26 might not also qualify for federal student loans. 

If a student is ineligible for federal student loans, even if temporary, their closest option is to borrow private student loans to cover their costs. 

Private student loan rates are lower than federal loan rates

Unlike private student loans, federal loans are not based on your credit history. 

Everyone is set to pay the same interest rate no matter what their credit score is. While this can help people with low credit scores, someone with a good credit score can secure a lower interest rate with private student loans. This helps to save money over time. 

Private student loans won’t offer a lower fixed rate than federal loans, but if the borrower or cosigner has an excellent credit score, the interest rate offered by a private student loan may be lower than federal loan interest rates.

They can choose between fixed and variable rates

Unlike federal student loans that have fixed interest rates, private student loans give borrowers the opportunity to choose between fixed and variable interest rates. Sometimes, they even allow students to switch between the two without any additional fees.

Most borrowers opt for fixed rates, but some like variable rates better because if the timing is right, they’ll be able to save more money than they can with fixed rates.

Variable rates usually start lower than fixed rates, so if they don’t increase too much, they can be even cheaper than fixed rates. So if the borrower pays off a variable rate loan before it rises too much, they’ll be able to save more money on interest compared to a fixed-rate federal loan.

Is everyone eligible for private student loans?

For federal student loans, the government assesses your level of financial need before they issue you a loan. 

Private lenders, on the other hand, have different eligibility requirements. They generally look for borrowers who have a great credit score, steady income, and debt-to-income ratio. 

Because most borrowers are undergraduates and might not have jobs, private lenders assess the financial ability of cosigners to repay the loans. So having no credit history or a low credit score will make it extremely hard for a student to qualify for traditional private student loans. 

There are private lenders that don’t consider credit scores, but they usually have higher interest rates than the ones who do. 

Do you need FAFSA for private student loans?

Before you can be eligible to get a federal student loan, you have to complete the Federal Application for Federal Student Aid (FAFSA). You don’t need to submit this to get a private loan, but it is advisable that you do it anyway because the application is the only way to access free financial aid like scholarships, grants and work-study.


At the end of the day, the decision to borrow private student loans is something you should ruminate over carefully. If you have exhausted your federal loan and other financial aid options, private student loans can be a great route to follow. 

Just try to carefully consider the options available to you before you decide to take out a private student loan. 

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