Dependent first-year college students can qualify for a maximum of $5,500 in federal loans annually, excluding parent PLUS loans. The average total cost of attendance at a four-year public school was $25,850 for the 2025-26 academic year. Federal loans would pay for less than 25% of that cost.
After exhausting scholarships, grants, and federal loan limits, many borrowers turn to private student loans to cover the remaining gap. Private student loans differ significantly from federal education debt.
Private student loans are issued by banks, credit unions, nonprofit organizations, and for-profit financial institutions, unlike federal loans from the U.S. Department of Education. They constitute a small percentage of the total student loan market. These loans can be more expensive than federal options and often lack benefits like deferment, forbearance, and forgiveness programs.
Private lenders typically offer undergraduate loans for associate or bachelor's degrees, graduate loans for advanced programs including medical school and law school, and parent loans that allow family members to borrow on behalf of students. With private parent loans, the student has no legal obligation to repay; the loan is solely in the parent or family member's name.
Once issued, private loans function similarly to federal loans, with funds sent directly to the college for tuition and fees. Any remainder is provided to the student for other expenses. However, private loans differ in borrowing amounts, eligibility, rates, in-school payments, and repayment terms.
Most federal student loans have annual and lifetime borrowing limits, though PLUS loans can supplement after direct loan limits are met. Private lenders usually allow borrowing up to the school-certified cost of attendance.
Private loans are credit-based, requiring good to excellent credit scores between 670 and 850 and minimum income requirements such as $25,000 annually. Few college students meet these criteria, so approximately 95% of private undergraduate student loans are co-signed, according to a 2025 Enterval Analytics report.
Federal student loans have fixed interest rates, with undergraduates at 6.39% for the 2025-26 school year. Private loan rates vary based on credit and can be fixed or variable, ranging from 3% to 17% or higher.
Many private lenders require some form of monthly payment while in college. Options include immediate full payments, interest-only payments, fixed small payments like $25 monthly, or deferred payments until after graduation. Deferred plans typically have the highest overall repayment cost and higher rates.
Private loan terms can range from five to fifteen years, offering more control than federal loans. Longer terms mean lower monthly payments but higher overall interest costs.
Private student loans can supplement federal aid when it doesn't cover full costs or if students don't qualify for federal loans. Depending on credit history, borrowers may access competitive rates and terms. Some lenders allow prequalification checks without impacting credit.
Federal loans offer long-term benefits like forgiveness and deferment programs, making them a primary choice. Private loans lack federal forgiveness programs and income-driven repayment plans.
To obtain a private student loan, applicants must apply through individual lenders instead of using the centralized FAFSA system. The process involves gathering personal information, finding a co-signer, shopping around for rates, filling out an application with a hard credit check, and reviewing and signing the loan agreement. Lenders certify the loan amount with the college before disbursing funds.