Private Student Loans for Undergraduates

For an undergraduate student, the financial aid process can be very confusing. There are forms for your school, forms for the government and forms for your student loans. After a while, you may lose sight of how this is helping you pay for college. The plan is to save as much money as possible by applying for various forms of financial aid, starting with free money first. Our diagram below illustrates the hierarchy of financial aid that will likely save you the most money:

Financial Aid Type Cost How to Apply
Scholarships Free - you don't have to pay them back!
  1. Fill out the FAFSA - for scholarships from your school
  2. Private scholarship applications - available through your school, community, or groups you are involved with Grants Free - you don't have to pay them back!
Grants Free - you don't have to pay them back!
  1. Fill out the FAFSA - to become eligible for state and federal grants
  2. Grant applications - for research, special interest or study abroad
Federal Perkins Loan 5% fixed rate (Need based loan)
  1. Fill out the FAFSA
Direct Stafford Loans (2010-2011 school year) 6.8% fixed rate unsubsidized loans
4.5% fixed rate subsidized loans
1% origination fee
  1. Fill out the FAFSA
  2. Complete a Direct Stafford Loan Application
Direct PLUS Loans for Parents Your parents can take out a federal loan at a fixed rate of 7.9%
4% origination fee
  1. Fill out the FAFSA
  2. Your parents will complete the Direct PLUS Loan Application
Private Education Loans Interest rate, origination fee, and other fees vary by lender
  1. You will likely need to find a credit-worthy co-signer
  2. Complete an application for private education loans

With all those different types of financial aid, why do undergraduate students need private education loans?

Unfortunately, not everyone will qualify for scholarships or grants, and even if they do, it may not be enough to pay for college entirely. In addition, the federal government has limits on how much you can borrow, depending on your academic year in school. Once you have used up your free money and federal loans, you may need to use private education loans to cover your remaining college costs (unless your parents are going to take out a Direct PLUS loan for parents or pay for your college in cash).

The example below illustrates a freshman student's college expenses and financial aid package. Since this student still needs $7,500 to pay for college, he/she may consider using private education loans to fill the gap.

College Expenses Amount Financial Aid Amount
Tuition $10,000 Scholarship $1,500
Books $500 Grant $500
Food $1,000 Work Study $2,000
Room & Board $6,000 Direct Stafford Loan (Freshman) $5,500
Laptop $1,500 Personal Savings $2,000
Total $19,000 Total $11,500
  Still need $7,500 - consider private education loans

How do private student education loans work?

Private education loans are credit-based loans used to pay for college, and should only be considered once you have exhausted free money and federal Direct loans. You can use private education loans to cover college expenses like tuition, books, housing, food, lab fees, travel, etc. You usually do not need to fill out a FAFSA to apply for private education loans. Interest rates on private student loans are generally variable, which means that the rate will change over time. The specific interest rate and fees that you will be charged is determined by your credit and that of your co-signer.

How can I get approved for private education loans?

These days, it's become much harder to get approved for private education loans. Most students will need a co-signer with good credit to get approved. If you are considering private education loans, you should read our Understanding Credit section to learn more about what makes a good co-signer.

Why do undergraduate students need a co-signer for private education loans?

Private education loans are unsecured loans, meaning that there are no assets like a house or car for a lender to take in the event of default. Most undergraduate students have little or no income, and a very brief credit history. In order for an undergraduate to get approved for private education loans, lenders today generally require a co-signer who will also be responsible for the loan in case the student fails to pay it back. Get more information on Finding a Co-signer.