Types of private student loans

Private student loans are a type of personal loan specifically designed to pay for education expenses. These are offered by banks, credit unions, state agencies, universities and online lenders. Private student loans can serve as a lifeline when other forms of aid fall short, as many lenders offer amounts equal to your full cost of attendance.

However, these loans are not a one-size-fits-all type of product. You’ll need to compare multiple options before deciding on one to get the best loan for your needs.

1. Degree-specific loans

On a basic level, private lenders typically offer undergraduate and graduate student loans. However, some may also go beyond that with degree-specific loans for medical, dental and business school, as well as for law degrees. You may even be able to get a loan to study for the bar exam or for your time at a community college.

Degree-specific loans may have perks uniquely tailored to the needs of that program. For instance, medical school loans tend to offer higher loan amounts and longer grace periods compared to those offered for other graduate degrees.

2. International student loans

International students may have a hard time getting approved for credit when they need it. They are also generally not eligible for federal student loans, which leaves private loans as their only financing option after exhausting other aid.

Some lenders specialize in student loans for international students who may not meet the standard requirements for traditional private loans, though international students may need to have a co-signer who is a U.S. citizen to be approved. These loans may also come with higher-than-average interest rates, as the lender is assuming a greater risk.

3. Bad credit loans

If you need student loans and your credit history is poor or nonexistent, your best bet is federal student loans because they typically don’t require a credit check. However, some lenders offer bad credit student loans, which have less stringent credit requirements for college students who haven’t had the chance to build credit.

Bad credit private student loans usually take into account factors other than your credit profile, such as future career earnings and your field of study to approve you for a loan. On the downside, because these loans represent more risk, they tend to come with higher rates and fees than the average private loan.

If possible, look for a lender that allows co-signers, which may help you secure a lower rate. Just keep in mind that the co-signer is equally responsible for the loan.

4. State-specific loan programs

Many states offer private student loans through a specific state agency. Examples include the Rhode Island Student Loan Authority (RISLA), the Iowa Student Loan (ISL) Education Lending and the Bank of North Dakota.

These private student loans are typically reserved for students who are attending a college within the state’s borders but possibly also for residents who are studying in another state. Eligibility requirements vary from state to state.

5. Income share agreements

Income share agreements (ISAs) function differently than traditional student loans. Instead of making a fixed monthly payment based on your student loan balance and an interest rate, you’ll pay a percentage of your income over a fixed number of years.

Before you apply for an income share agreement, figure out what the income percentage and repayment term will be. These agreements typically also have a salary floor and a payment cap to ensure that both parties are treated fairly.

6. Parent loans

Some private lenders offer education loans issued to the parent of the student. Parent loans typically function like any other private student loan in terms of interest rates, repayment terms and grace periods. The difference, however, is that the parent — not the student — will be responsible for making payments.

7. Refinanced student loans

Several private financial institutions offer refinance student loans, which are private student loans that are used to consolidate your existing student loans. Refinancing your student debt might make sense if you can qualify for a lower rate, as doing so could save you thousands of dollars in interest.

In addition, refinancing to a loan with a longer term can make your monthly loan payments more affordable. But note that doing this will result in paying more interest over the life of the new loan.

How to determine which private student loan is best for you

The best private student loan for you depends on your priorities — whether that’s the lowest interest rate possible, flexible repayment terms or unique perks that will help you with repayment. When considering private student loans, compare all the loan features, including repayment terms, fees and interest rates, to get a sense of what your repayment will look like after graduation. You can use a student loan calculator to estimate the cost of the loans you’re offered.

Once you decide how much funding to apply for and which lenders align with your priorities, you can decide where to apply. You may consider multiple applications to compare the rates and terms you qualify for with different companies.

Such applications typically require a hard credit check, so limiting your applications to a short time window can help minimize the impact on your credit score. If you’re comparing income share agreements with more traditional private loans, you can also use an online calculator to get an idea of what you’ll end up paying and how that compares to what you’d pay in interest on a different type of loan.

The bottom line

Federal student loans, with benefits like income-driven repayment and access to forgiveness, should be your first option to pay for college expenses when scholarships and grants aren’t enough. Most experts — and even private student loan companies themselves — recommend using as much of your federal loan allotment as possible before turning to private loans. But private student loans can help provide additional funds if you’ve exhausted federal student loan borrowing options.

There are many types of private student loans, including degree-specific loans, international student loans, and bad credit loans. Identifying the best type of loan for your needs is a personal decision, but it’s important to search for the best loan terms and interest rate based on your financial picture.