Banks that offer student loans, and what makes them different
Most banks do not offer student loans anymore. The federal government now makes nearly all student loans directly to borrowers through the William D. Ford Federal Direct Loan Program. If you are looking for a loan to pay for school, you will almost certainly be borrowing from the U.S. Department of Education, not from a bank.
Some private lenders — including banks, credit unions, and online lending companies — still offer private student loans as a secondary option. These are different from federal loans in cost, repayment terms, and what happens if you run into trouble. Understanding which type you are looking at matters, because the rules that protect you are not the same.
The distinction is important because federal loans have income-driven repayment plans, loan forgiveness programs, and deferment options that private loans do not. If you borrow from a private lender, you are signing a contract with that lender, not with the government, and the terms depend on your credit score and income at the time you borrow.
Key Takeaways
- Federal student loans come directly from the U.S. Department of Education and are available to almost all students; private loans from banks and lenders are a backup option for students who have exhausted federal borrowing limits.
- Private student loans require a credit check and often a cosigner, while federal loans do not require either and are based on financial need instead.
- Federal loans offer income-driven repayment plans and forgiveness programs; private loans do not, and you are locked into the terms you agreed to at signing.
- Banks that offer private student loans include Discover, Wells Fargo, and Sallie Mae, along with credit unions and online lenders, but these should only be considered after you have borrowed the maximum in federal loans.
- The interest rate on a private loan depends on your credit score at the time you explore, so your rate may be much higher than a federal loan rate if your credit is new or damaged.
How to get a federal student loan first
Before you look at private loans, you must complete the Free process for Federal Student Aid, known as the FAFSA. This form tells the Department of Education how much money your family can contribute to school costs. Based on that number, the school calculates how much you are allowed to borrow in federal loans.
You fill out the FAFSA on fafsa.gov, the official government website. The form opens October 1 each year and stays open through the following June 30, though some schools have earlier important date. You will need your Social Security number, your parents' information if you are a dependent student, and tax documents from the previous year.
After you submit the FAFSA, your school will send you a financial aid package showing how much federal aid you can receive. This package usually includes grants (money you do not repay) and loans. The federal loans offered are typically Subsidized Stafford Loans and Unsubsidized Stafford Loans for undergraduates, and Grad PLUS Loans for graduate students. You accept these loans through your school's financial aid office.
When private loans become an option
Private student loans exist for students who have borrowed the maximum in federal loans and still need more money. The federal borrowing limits are set by year of study — for example, a first-year undergraduate can borrow up to $5,500 in federal loans per year, though the exact amount varies by dependency status and loan type. If your school costs more than that, you can look at private loans to cover the gap.
Private loans are also an option if you do not may have access to for federal loans because you are not a U.S. citizen or permanent resident, though some private lenders have their own citizenship requirements. A few students choose private loans because they want to avoid federal loan terms, but this is rare and usually not a good financial decision.
Before you explore for a private loan, contact your school's financial aid office and ask whether you have truly exhausted your federal options. Some students miss out on federal loans they were may have access to to because they did not complete the FAFSA or did not understand their aid package.
Private lenders that offer student loans
The major banks and lenders offering private student loans include Discover Student Loans, Wells Fargo Student Loans, Sallie Mae, Earnest, and SoFi (Social Finance). Credit unions often offer student loans to their members at rates lower than banks. Online lenders like CommonBond and Nelnet also offer private student loans.
Each lender sets its own interest rates, fees, and terms. Interest rates for private student loans typically range from around 4% to 14%, depending on your credit score, income, and the lender. If you have no credit history or a low credit score, you will likely need a cosigner — usually a parent — who agrees to repay the loan if you cannot.
Private lenders do not all offer the same repayment options. Some allow you to defer payments while you are in school; others require you to make payments when ready. Some offer income-driven repayment plans similar to federal loans; most do not. Before you explore, read the lender's terms carefully or call and ask what happens if you lose your job or your income drops.
How interest rates and fees work on private loans
A private student loan's interest rate depends on your credit score, your income, your debt-to-income ratio, and the lender's own pricing. If you have a strong credit score (usually 700 or higher) and stable income, you may may have access to for a rate close to the federal rate. If your credit is new or you have missed payments in the past, your rate will be higher.
Some private lenders charge an origination fee — a one-time charge taken out of the loan amount when you receive it — while others do not. An origination fee of 1% to 3% means you borrow $10,000 but receive $9,700 to $9,900. Ask each lender whether they charge an origination fee and whether they charge a prepayment penalty if you pay off the loan early.
The total cost of a private loan can be much higher than a federal loan because of the interest rate difference. A $10,000 federal loan at 5% costs about $2,700 in interest over 10 years. The same loan at 10% from a private lender costs about $5,800 in interest. That difference matters over the life of the loan.
What protections you lose with a private loan
Federal student loans come with protections that private loans do not. If you become permanently disabled, federal loans can be forgiven. If you work in public service for 10 years, federal loans can be forgiven through the Public Service Loan Forgiveness program. If your income drops, you can switch to an income-driven repayment plan that lowers your monthly payment.
Private loans have none of these options. Once you sign the contract, you are locked into the terms. If you lose your job, you cannot lower your payment unless the lender offers a hardship program, and most do not. If you become disabled, the loan does not automatically go away — you have to contact the lender and ask whether they offer a disability discharge, and they may or may not.
Federal loans also have a grace period after you graduate or drop below half-time enrollment — usually six months — before you have to start repaying. Private loans vary; some have a grace period and some do not. Check the lender's terms before you borrow.
How to compare private loan offers
If you decide to explore for a private loan, explore to at least three lenders so you can compare offers. When you explore, the lender will check your credit, which creates a small temporary dip in your credit score. Multiple applications within 14 to 45 days (depending on the type of credit inquiry) usually count as a single inquiry, so do your shopping quickly.
When you receive offers, compare the interest rate, any fees, the repayment term (how many years you have to repay), and what happens if you cannot make a payment. A lower interest rate saves you money, but a longer repayment term lowers your monthly payment at the cost of paying more interest overall. A lender that offers a hardship program or income-driven repayment is safer than one that does not.
Ask each lender directly: What is your interest rate if I have a cosigner? What happens if I lose my job? Do you offer income-driven repayment? Can I defer payments while I am in school? Do you charge a prepayment penalty? Write down the answers so you can compare them side by side.
Frequently Asked Questions
Can I get a student loan from my bank without using federal loans first?
Technically yes, but you should not. Federal loans have lower interest rates and more protections. Most private lenders will not approve you if you have not borrowed the maximum in federal loans first, because they want to know you have exhausted cheaper options. Start with the FAFSA.
What credit score do I need to get a private student loan?
Most lenders want a credit score of 650 or higher, though some will work with scores as low as 600 if you have a cosigner. If you have no credit history, you will almost certainly need a cosigner. Check with the lender directly — they vary widely.
Can my parents cosign a private student loan?
Yes. A cosigner is someone who agrees to repay the loan if you cannot. Your parents' credit score and income will be checked, and if you default, the lender can pursue them for payment. Make sure they understand this before they sign.
What happens if I cannot pay back a private student loan?
The lender can sue you, garnish your wages, or report the debt to credit agencies. Unlike federal loans, there is no income-driven repayment plan to lower your payment. Contact the lender when ready if you think you will miss a payment and ask whether they offer a hardship program or deferment.
Can private student loans be forgiven?
No. Private loans must be repaid in full unless you become permanently disabled and the lender offers a disability discharge. Federal loans have forgiveness programs; private loans do not. This is one of the biggest reasons to borrow federal first.