After Federal Aid Is Exhausted: How to Evaluate Private Student Loans
- Why Private Student Loans?
- Types of Private Student Loans
- Comparing Private Loans
- When to Take Out Private Loans
- FAQ
Most student loans are federal and have borrowing limits. If you reach those limits, you may need private student loans to cover remaining costs. Private loans have fewer protections and widely varying terms set by lenders, making them riskier and potentially more expensive over time.
Still, they may be necessary to fund your education, especially with the elimination of GRAD PLUS loans and new federal limits that may make some higher-cost graduate degrees harder to afford. This guide explains how to evaluate private loans, when they make sense, and the risks involved.
Why Take Out Private Student Loans?
Students often turn to private loans if they hit federal loan limits, their total aid doesn’t cover the full cost of attendance, or they don’t qualify for enough need-based aid. Private student loans typically have higher interest rates and fewer protections, but can help cover remaining costs.
1. You Hit the Federal Loan Limit
Federal loans have annual limits; undergraduates can borrow $5,500-$7,500 per year, while graduate students can borrow $20,500 annually, with higher limits (up to $50,000) for certain professional degree programs. Once you reach these limits, you can’t borrow more through federal programs, even if your remaining costs are high.
| Program Type | Annual Federal Limits | How Often Students Exceed Annual Limits** |
|---|---|---|
| Clinical and Counseling Psychology (Doctoral-level programs) | $50,000 | Rare |
| Social Work (MSW) | $20,500 | Less common |
| *Other Psychology and Counseling Programs (Master’s-level programs) | $20,500 | Common |
**Based on a representative sample of at least 50 graduate-level programs at four-year institutions
2. Cost of Attendance Exceeds What Federal Aid Covers
Your total cost of attendance includes tuition, housing, food, books, and other expenses. At higher-cost schools or programs, your full federal aid package (loans, grants, work-study) may still fall short, leaving a gap to cover.
3. You Don’t Qualify for Enough Federal Aid
Financial need determines how much federal aid you receive. If your family’s income or assets are too high, you may receive limited need-based aid, even if you can’t afford the full cost of attendance. This can make private student loans a necessary lifeline.
Types of Private Student Loans: A Brief Overview
Private student loans usually fall into three categories: undergraduate, graduate, and parent loans. They differ by borrower, requirements, purpose, rates, and risk. Undergraduate loans often need a cosigner and have higher rates; graduate loans rely more on the student’s credit, and parent loans are the parent’s responsibility. The table below breaks down each type.
| Type of Private Loan | Who Can Borrow | Typical Requirements | Why It’s Used | Typical Rate/Risk Level |
|---|---|---|---|---|
| Undergraduate loans | Student (often with cosigner) | Limited credit, usually need cosigner | Federal aid package doesn’t cover full cost | Higher rates on average |
| Graduate loans | Student | Stronger credit/income | Program costs exceed federal loan limits | Moderate rates on average |
| Parent loans | Parent (or guardian) | Based on parents’ credit and income | Student can’t qualify alone, or parent prefers to take on the loan | Varies significantly (depending on parent credit) |
How to Compare Private Student Loans
Private student loans vary based on the lender’s business model and your (or your cosigner’s) credit and financial profiles. Because they are private lenders rather than government entities, their terms vary widely. Consider these key factors to understand the big picture of private student loans:
- Interest rate (fixed vs. variable): This is the cost of borrowing, expressed as a percentage of your loan balance, charged each year. Fixed rates stay the same, while variable rates can change and may cost less if rates stay low.
- Total cost and fees: The total cost includes the principal (original loan amount), interest, and any fees. While many private lenders have no upfront fees, late fees usually apply for missed payments.
- Loan terms: Loan terms are how long you have to pay back the loan, such as 5, 10, 15, or 20 years. Shorter terms have higher monthly payments but lower total interest, while longer terms have lower monthly payments but cost significantly more in interest over time.
- Repayment flexibility: Lenders offer different repayment options, such as full deferment (pay nothing until six months after graduation), fixed pay (pay a small flat fee per month while in school), and interest-only (pay only the interest while in school).
- Borrower protections: Private loan protections may include cosigner release after 12-48 months of on-time payments and discharge if the borrower dies or becomes permanently disabled.
- Lender reputation: A lender’s reputation and customer service affect how appealing they are to customers. Banks may offer loyalty discounts if you have an established account, while online lenders often provide faster loan processing.
The Reality of Private Student Loans
Private student loans can fill funding gaps, but they come with tradeoffs. They often have higher and sometimes variable interest rates, which can significantly increase the total amount you repay over time. Approval and your interest rate depend on your credit or a cosigner.
They also offer fewer protections than federal loans, such as income-driven repayment and forgiveness options. Private student loans may be necessary, but you should exhaust federal aid and other options before turning to them.
Should You Take Out Private Student Loans?
You should only take out private student loans after exhausting financial aid and lowering costs (e.g., choosing an in-state school, budgeting, or cheaper housing). They typically have higher interest rates and fewer protections, so treat them as a last resort. Use private loans only after you’ve done the following:
- I’ve maxed out my federal student loans
- I’ve applied for scholarships, grants, or assistantships
- I’ve looked for ways to lower my total cost (school, housing, etc.)
If you answered “no” to any of these questions, look into them before taking out a private loan.
- I still have remaining costs after maxing out my federal student loans
- My total cost of attendance exceeds my financial aid package
- I don’t qualify for enough federal or need-based aid to cover my program
If any of these apply to you, a private student loan may be a good option to cover the remaining gap.
Frequently Asked Questions About Private Student Loans
The One Big Beautiful Bill Act (OBBBA) sets new federal loan caps for graduate students. Those in academic or research-focused master’s and Ph.D. programs can borrow up to $20,500 per year and $100,000 total. Students in professional programs (e.g., medicine, law, pharmacy) can borrow up to $50,000 per year and $200,000 total. It also caps total federal borrowing at $257,500 across undergraduate and graduate degrees.
