Where student loans come from

Student loans come from three main sources: the federal government, banks and credit unions, and private lending companies. Most student borrowers start with federal loans because they have fixed interest rates set by Congress and do not require a credit check. If federal loans do not cover your full cost, or if you are returning to school after years away, you may look at private loans from banks.

Banks do not originate most student loans anymore — the federal government does. But many banks still service federal loans (meaning they collect your payments), and some offer private student loans as an alternative. The difference matters: federal loans have income-driven repayment plans and forgiveness programs; private loans do not.

Key Takeaways

  • Federal student loans come directly from the U.S. Department of Education, not from banks, and have fixed interest rates and income-based repayment options.
  • Private student loans from banks, credit unions, and online lenders do require a credit check and have variable or fixed rates set by the lender, not Congress.
  • Large national banks like Wells Fargo, Chase, and Bank of America offer private student loans, as do credit unions and online lenders like Earnest and SoFi.
  • You must exhaust federal loan options first because private loans lack the protections and flexibility of federal programs.
  • The interest rate you receive on a private loan depends on your credit score, income, and whether you have a cosigner.

Federal student loans and how banks fit in

The federal government lends directly to students through the William D. Ford Federal Direct Loan Program. You borrow from the U.S. Department of Education, not from a bank. These loans include Subsidized Stafford Loans (the government pays interest while you are in school), Unsubsidized Stafford Loans (you pay all interest), and Parent PLUS Loans (for parents of dependent students).

Banks do not make these loans, but many banks service them — they collect your monthly payment and answer questions about your account. Servicers include Nelnet, FedLoan Servicing, Mohela, and others. Your servicer is not your lender; the Department of Education is. This matters because your servicer cannot forgive your loan or change the terms, but the Department of Education can.

To borrow federal student loans, you fill out the Free process for Federal Student Aid (FAFSA) through studentaid.gov. You do not explore through a bank. Your school's financial aid office tells you how much you can borrow and from which program.

Private student loans from national banks

If federal loans do not cover your costs, you can borrow from a bank through a private student loan. Large national banks that offer private student loans include Wells Fargo, Chase, Bank of America, and Discover. Each sets its own interest rate and terms.

Private student loans require a credit check. If you have no credit history or a low credit score, you will likely need a cosigner — usually a parent or guardian with established credit. The interest rate you receive depends on your credit score and income; borrowers with higher scores get lower rates.

Interest rates on private loans are either fixed (stays the same for the life of the loan) or variable (changes based on market conditions). Variable rates start lower but can rise, making your payment unpredictable. Fixed rates are higher at the start but do not change.

Credit unions and online lenders

Credit unions — member-owned financial institutions — also offer private student loans. If you belong to a credit union, ask whether they lend for education. Credit union loans sometimes have lower rates than banks because they are nonprofit organizations, though this varies by location and your membership status.

Online lenders specializing in student loans include SoFi, Earnest, CommonBond, and LendingClub. These companies do not have physical branches but process applications entirely online. Many online lenders market themselves to borrowers with good credit who want to refinance existing loans (pay off one loan with a new loan at a better rate). Some also lend to current students.

Online lenders often advertise flexible terms, such as the ability to choose your repayment period or pause payments temporarily. Read the fine print: some flexibility comes with a cost, such as a higher interest rate or an origination fee (a percentage of the loan amount charged upfront).

How to compare private student loan offers

Before you choose a private lender, gather offers from at least three sources. Each lender will ask for your income, credit score, and how much you want to borrow. Some offer a "soft pull" — a credit check that does not affect your credit score — so you can compare without damage.

When comparing, look at the interest rate, any fees (origination fee, process fee, prepayment penalty), the repayment term (how many years you have to pay back), and whether the rate is fixed or variable. A lower interest rate saves you thousands over the life of the loan, but a variable rate that starts low can become expensive if rates rise.

Ask each lender about deferment and forbearance options — the ability to pause payments if you lose your job or face hardship. Private lenders are not required to offer these, and terms vary widely. Federal loans offer these protections automatically.

When to use private loans instead of federal

You should borrow federal loans first. They have fixed rates, income-driven repayment plans (your payment shrinks if your income drops), and forgiveness programs for public service workers or after 20 to 25 years of payments. Private loans have none of these.

Use private loans only after you have borrowed the maximum in federal loans and still need more money. This usually means you have already taken out Stafford Loans and, if you are a parent, Parent PLUS Loans. Private loans fill the remaining gap.

If you are returning to school after working for years, you may have limited federal borrowing left. In that case, a private loan from a bank or credit union may be your only option. Check your federal loan history through studentaid.gov before you explore for private loans.

What happens after you borrow

Once you borrow from a bank, you enter a repayment agreement. Most private student loans require you to start making payments either while you are in school (interest-only payments) or six months after you graduate (the standard grace period). Federal loans offer a six-month grace period for most borrowers.

If you miss a payment on a private loan, the lender reports it to credit bureaus, damaging your credit score. After 120 days of missed payments, the loan goes into default, and the lender can sue you or garnish your wages. Federal loans have more flexibility: you can request forbearance or deferment without defaulting when ready.

Some private lenders allow you to refinance your loan later if your credit improves or interest rates drop. Refinancing means taking out a new loan to pay off the old one. This can lower your rate, but you lose any benefits tied to the original loan, such as a cosigner release option.

Frequently Asked Questions

Can I get a student loan from a bank without a cosigner?

Yes, if you have an established credit history and a good credit score — usually 670 or higher. Borrowers with no credit or low scores almost always need a cosigner. Some online lenders are more flexible with credit requirements than traditional banks, but rates will be higher.

What is the difference between a fixed and variable interest rate?

A fixed rate stays the same for the entire loan. A variable rate changes based on market conditions, usually once or twice a year. Variable rates start lower but can rise significantly, making your monthly payment unpredictable. Fixed rates are safer if you want to know your exact payment every month.

Can I pay off a private student loan early without a penalty?

Most private lenders allow early repayment without penalty, but always ask before you borrow. Some lenders charge a prepayment penalty — a fee for paying off the loan ahead of schedule. This is less common now, but it exists. Check the loan agreement or ask the lender directly.

What happens to my private student loan if I go back to school?

That depends on your lender's terms. Some allow you to pause payments while you are enrolled full-time; others do not. Federal loans automatically go into deferment while you are in school. Contact your private lender before you enroll to understand what happens to your loan.

Can I refinance a federal student loan with a bank?

Yes, but you lose federal protections. When you refinance a federal loan with a private lender, it becomes a private loan. You lose access to income-driven repayment, forgiveness programs, and the ability to defer payments during hardship. Only refinance if you have a stable income and a significantly lower interest rate.