Simple definition
A private student loan comes from a bank, credit union, or online lender rather than the government. The rate and terms usually depend on your credit, or a cosigner's, and the rate may be fixed or variable. Think of it like a regular consumer loan wearing a cap and gown: it funds school, but without the government safety net federal loans carry.
Why it matters
Private loans typically lack the income-driven repayment, generous deferment, and forgiveness options federal loans offer, so hardship help is limited. They also may carry variable rates that rise over time. Because protections and terms vary widely by lender, read the contract closely and ask questions before you sign.
Real-life example
Imagine a student who has borrowed the federal loans available to them but still has a funding gap. They take a private loan to cover the rest. If their income later drops, they find the private lender offers far fewer ways to pause or lower payments than their federal loans do.
Common mistakes
- Taking a private loan before exhausting available federal loan options.
- Overlooking whether the rate is fixed or variable, and how high it can climb.
- Assuming private loans offer the same hardship protections as federal ones.
- Adding a cosigner without understanding they are fully on the hook too.
Pro tips
- Exhaust federal loan options first, since they carry more protections.
- Compare offers by APR, and note whether each rate is fixed or variable.
- Read the hardship and cosigner-release terms before signing anything.
- Only add a cosigner who understands they share full responsibility for the debt.
Related Money Dictionary terms
- Federal Student LoanAn education loan issued by the U.S. government that offers fixed rates and flexible repayment and hardship options.
- Student LoanMoney borrowed to pay for education, offered by the government or private lenders, repaid with interest after school.
- CosignerA person who agrees to repay your loan if you cannot, using their credit to help you qualify and sharing full liability.
- RefinancingReplacing an existing loan with a new one, usually to get a lower rate, a different term, or a smaller monthly payment.
- Interest CapitalizationWhen unpaid interest gets added to your loan principal, so future interest is charged on a larger balance.
Frequently asked questions
Should I use federal or private student loans first?
Most guidance is to use available federal loans before private ones, because federal loans generally offer more protections, like income-driven repayment and forbearance. Private loans can fill a remaining gap, but come with fewer hardship options and terms based on credit. Compare carefully, and confirm the details of any loan directly with the lender.
What does a cosigner do on a private student loan?
A cosigner agrees to repay the loan if the primary borrower does not, which can help a student with little credit qualify or get a lower rate. But the cosigner is fully responsible, and missed payments hurt both people's credit. Some lenders allow cosigner release later; ask whether and how that works.
Can a private loan have a variable rate?
Yes. Many private student loans offer a choice between a fixed rate, which stays the same, and a variable rate, which can rise or fall with a benchmark index. A variable rate may start lower but can grow, raising your payment. Ask how high a variable rate could go before choosing.
Knowing what Private Student Loan means is knowledge — the first half. A brick gets placed when you act on it: compare any private student loan against your remaining federal options before signing.
Also builds: Debt Management
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Plain-English education — not personalized legal, tax, or investment advice.