Banks offer federal student loans through the government, and private student loans through their own money
When you borrow for school, you have two separate paths. Federal student loans come from the U.S. Department of Education, but you explore through your school's financial aid office — banks do not originate them. Private student loans come directly from banks, credit unions, and online lenders using their own funds, and you explore to the lender itself.
Most students start with federal loans because they offer fixed interest rates set by Congress, income-based repayment plans, and forgiveness programs that private loans do not. Private loans exist for students who have exhausted federal options or need to borrow more than federal limits allow. The bank you use for checking and savings may also offer private student loans, but you are not required to use them — you can shop any lender.
Key Takeaways
- Federal student loans are funded by the government but processed through your school's financial aid office, not directly through a bank.
- Private student loans come from banks, credit unions, and online lenders, and you explore directly to the lender of your choice.
- Your school's financial aid office will tell you the maximum federal loan amount you can borrow before you need to consider private options.
- Private loan terms vary widely by lender — interest rates, repayment options, and whether a cosigner is required differ significantly between banks.
- Comparing private lenders before you borrow can save you thousands in interest over the life of the loan.
How federal student loans work through banks
Federal loans do not come from banks, but banks play a role in servicing them. When you take out a federal loan, the Department of Education lends you the money. Your school's financial aid office processes the paperwork, and a loan servicer — sometimes a bank, sometimes a specialized company — handles your monthly payments and account management after you graduate.
You do not choose your servicer. The Department of Education assigns one based on which loans you have. Common federal loan servicers include Nelnet, Mohela, Aidvantage, and others. You can look up your servicer on StudentAid.gov by logging into your account. The servicer is who you contact to make payments, ask about repayment plans, or request forbearance if you hit financial hardship.
Federal loans include Direct Subsidized Loans (the government pays interest while you are in school), Direct Unsubsidized Loans (interest accrues from day one), and Direct PLUS Loans (for parents or graduate students). Interest rates are set by Congress and are the same no matter which bank or servicer handles your account.
Private student loans from major banks
Large banks that offer private student loans include Wells Fargo, Bank of America, Discover, and Sallie Mae (which is now Navient). Credit unions like PenFed and Navy Federal also lend to students. Online lenders such as Earnin, SoFi, and Ascent focus entirely on student lending. Each has different requirements, interest rates, and terms.
Private loans typically require a credit check. If you have no credit history or a low score, most lenders will ask for a cosigner — usually a parent or guardian who promises to repay if you cannot. Some lenders offer loans without a cosigner if you have income or a strong credit profile, but interest rates are usually higher. Interest rates on private loans are variable or fixed, depending on the lender and the loan type you choose.
Private loans do not have income-based repayment plans or forgiveness programs. You repay on a fixed schedule — typically 5 to 20 years — regardless of your income after graduation. If you face hardship, you may be able to defer payments or request forbearance, but the terms depend on the lender's policy, not federal law.
Comparing private lenders side by side
| Lender Type | Examples | Cosigner Required? | Interest Rate Type | Repayment Terms |
|---|---|---|---|---|
| Large banks | Wells Fargo, Bank of America, Discover | Usually, unless you have strong credit | Fixed or variable | 5–20 years |
| Credit unions | PenFed, Navy Federal, Connexus | Varies; membership required | Fixed or variable | 5–20 years |
| Online lenders | SoFi, Earnin, Ascent, CommonBond | Varies; some offer no-cosigner options | Fixed or variable | 5–20 years |
| Specialized servicers | Navient, Sallie Mae | Usually required | Fixed or variable | 5–20 years |
When you shop for a private loan, request quotes from at least three lenders. Each quote will show you the interest rate you would receive, the monthly payment, and the total amount you would repay over the life of the loan. Comparing these numbers helps you see which lender offers the best terms for your situation.
When to use private loans instead of federal
Federal loans have annual borrowing limits. For the 2024–2025 school year, dependent undergraduates can borrow up to $5,500 in their first year, $6,500 in their second, and $7,500 in their third and beyond — with a total cap of $31,000. Graduate students and parents have higher limits. Once you reach the federal cap, you cannot borrow more federal money that year.
If your school costs more than the federal limit, or if you want to borrow additional money for living expenses, private loans fill the gap. Some students also use private loans to refinance federal loans after graduation, though this means losing federal protections like income-based repayment and forgiveness programs.
Before taking a private loan, exhaust your federal options. Federal loans offer more flexibility and protection. Private loans make sense only when federal loans are not enough or when you have already graduated and want to refinance at a lower rate.
How to find and compare private lenders
Start by asking your school's financial aid office which private lenders they recommend or have relationships with. Many schools have preferred lender lists, though you are not required to use them. You can also search online for "private student loans" and visit lender websites directly to request a quote.
When you request a quote, the lender will ask for basic information: your name, school, expected graduation date, and sometimes your Social Security number. A soft credit inquiry (which does not hurt your credit score) shows you what rate you might receive. Once you decide to move forward, a hard inquiry happens, which does affect your score slightly.
Gather quotes from at least three lenders and compare the interest rate, monthly payment, repayment term options, and any fees. Some lenders charge origination fees (a percentage of the loan taken upfront) or prepayment penalties (a fee if you pay off early). Others charge neither. Read the fine print before you sign.
What happens after you borrow
Once you take out a private loan, the lender deposits the money directly into your school's account. Your school applies it to tuition, fees, and room and board, then sends any leftover to you. You are responsible for repaying the full amount, plus interest, starting either while you are in school or after you graduate — depending on the loan type and lender.
Make a note of your lender's contact information and log into your account regularly to track your balance and upcoming payments. If your circumstances change — you drop out, change schools, or face financial hardship — contact your lender when ready. Ignoring payments damages your credit and can lead to default, which makes it much harder to borrow in the future.
Frequently Asked Questions
Can I get a private student loan without a cosigner?
Some lenders offer no-cosigner loans if you have established credit, a job, or income. Online lenders like SoFi and Earnin are more likely to approve no-cosigner loans than traditional banks. However, interest rates are typically higher without a cosigner. If you cannot find a no-cosigner option, ask a parent or trusted adult to cosign.
What is the difference between a fixed and variable interest rate?
A fixed rate stays the same for the entire life of the loan, so your monthly payment never changes. A variable rate starts lower but can increase or decrease based on market conditions, which means your payment could go up. Fixed rates are more predictable; variable rates are riskier but may save money if rates fall.
Can I use a private student loan for anything other than tuition?
Yes. Private loans can cover tuition, fees, room and board, books, computers, and living expenses. The money goes to your school first, and any remainder is sent to you. Check your lender's rules — some restrict how you can use leftover funds, while others allow you to use it for any education-related cost.
What happens to my private student loan if I drop out?
This depends on your lender's terms. Some loans enter repayment when ready if you drop below half-time enrollment. Others give you a grace period. Contact your lender as soon as you know you are leaving school — do not ignore the loan. Defaulting damages your credit and can lead to wage garnishment.
Can I refinance a private student loan to a lower rate?
Yes, but only after you graduate and have established a credit history. Refinancing means taking out a new loan to pay off the old one. You can refinance with a different lender or the same one. Compare rates before refinancing — make sure the new rate is actually lower and that you are not extending the repayment term, which costs more in total interest.