Paying for college isn’t easy, especially with rising tuition costs, which have increased 36.8% since 2010, according to the Education Data Initiative. While scholarships, grants and federal financial aid are available, it’s not always enough to cover the high cost of attending college. 

For many students, private student loans bridge the gap left by federal aid and scholarships. Private financial organizations, such as banks, credit unions and lenders, offer these loans, but interest rates and repayment terms vary significantly. Before you sign for a private student loan, read this guide to understand the dos and don’ts of private student loans. 

Private student loan do’s 

Do compare interest rates

The total cost of a private student loan includes the principal (the actual amount borrowed), the interest rate and fees. Your interest rate for a private student loan depends on factors such as the economy, your credit score and your cosigner’s credit history.

Unlike federal loans, the government doesn’t guarantee private student loans, and their interest rates may change. 

Private student loan interest rates are typically based on an index, such as the prime rate or U.S. Treasury securities. When researching private student loans, assume rates will change over time. Compare multiple loan providers and their current interest rates, along with refinancing options, which can help you save money on interest (even if it changes) in the future. 

Do consider repayment terms

Lenders offer different types of repayment options, such as offering interest-only payments while you’re in school or allowing you to defer the payments until after graduation. 

While it’s tempting to take a smaller monthly payment amount, remember that the longer you’re paying off the student loans, the more you’ll pay in interest. Different lenders offer various repayment plans that’ll give you more or less flexibility in terms of how many years you have to pay it back, how much your monthly payments will be and even graduated payments that increase over time. Most private student loan lenders don’t offer income-based repayment plans, which is more common with federal loans. 

Pro tip: If you defer payments until after school, your total loan amount will be higher because interest accrues while you’re in school and is then capitalized (meaning the unpaid interest is added to your principal, increasing your balance and future interest). Choosing monthly payments while in school reduces the interest and principal you’ll owe after school. Some lenders also offer interest-only repayment plans while you attend school, which cuts down on how much you owe later. 

Do look into federal options first 

Logan Allec, a CPA and owner of Clarita Wealth Management, explains, “A major ‘don’t’ with private loans is to make the mistake of thinking that private student loans are basically the same as federal student loans—just with a different name.”

Allec shares, “The reality is that federal student loans come with a range of protections that private student loans do not offer. For example, you may qualify for an income-driven repayment plan on your federal student loans, which may result in your loan balance being forgiven after a certain number of years.”

However, these benefits are rarely available for private student loans, so take advantage of any federal options first. Another huge benefit of federal loans is that the interest rates are usually fixed, so your interest rates won’t change over time, which isn’t a guarantee with private student loans. 

Private student loan don’ts 

Don’t skip the fine print

Most private student loans require a co-signer, making it critical to review the fine print. Many student borrowers ask family members to co-sign on their private student loans, and auto-default clauses are common, particularly with smaller lending institutions. 

An auto-default clause declares that your loan is due in full immediately if the co-signer files for bankruptcy or passes away, even when you’re in good standing. 

Always review the fine print closely to check for clauses like this, especially if your co-signer is older. If you’ve already signed a private student loan with this clause, look into releasing your co-signer from the loan or refinancing the loan completely in your name. 

Another important clause to look out for is what happens in the case of the borrower’s death or if they become unable to work due to disability. While it’s unpleasant to think about, most private student loans would still be owed in full by the co-signer, who could already be struggling with the death of their child, spouse or family member. Carefully review the fine print so you and your co-signer understand the full details of the loan, especially in worst-case scenarios. 

Don’t take the first loan offer

It’s challenging not to take the first loan offer, especially if you need the funds quickly, but shopping around can save you significant amounts of money after college. 

Nika Booth, a personal finance educator and founder of Debt Free Gonnabe, shares, “The biggest mistake I see people make when signing up for private student loans is not shopping around first.”

Shopping around gives students greater access to better rates, especially since private loans typically have higher interest rates and fees than federal loans. 

Booth explains, “Most people just take whatever their school’s preferred lender offers because it feels easier in the moment. Interest rates, loan terms, repayment and hardship options all vary by lender, so it pays to check out more than one and compare before signing.“

Don’t be swayed by deceptive practices 

Always vet your lender before applying for private student loans. Consider the following before working with a lender: 

• Check the lender’s track record with the state attorney general, the Better Business Bureau and local consumer protection agencies. 
• Never give out personal information over the phone, on the Internet or by mail unless you know exactly who the requesting lender is. 
• Be skeptical of advertisements, mailers or solicitations with seals from “government agencies.” Some shady private lenders add these logos or seals to their marketing to improve their perceived reputation. 
• Don’t be swayed by promotions, such as gift cards or credit cards. These won’t matter in the long run if you’re stuck with poor loan repayment terms. 
• Avoid any lenders or marketers who use high-pressure sales tactics, such as threatening to raise your interest rate if you don’t apply now. 

Don’t borrow more than you can afford 

A rule of thumb for student loans, especially private loans — which are notoriously less forgiving when it comes to refinancing plans and interest rates — is not to borrow more than what you expect to make during your first year out of college. 

While shopping for student loans, it’s up to you to keep your future best interests in mind. A lender’s approval of what they’ll lend you is not in your best interest as to what you can actually afford. A lender typically determines how much they’ll lend you based on your cosigner’s credit, rather than on what a reasonable monthly payment is for you. 

Bottom line

Following these tips can help you reduce your overall borrowing costs and avoid shady private lenders as you fund your education. If possible, speak with a trusted advisor before signing any paperwork, and always read the fine print, so you know the terms of your private loan. If you’re already enrolled in school, look for student loan counseling resources for additional information. 

Private student loans dos and don’ts FAQs

What are the downsides of private student loans?

The downsides of private student loans include higher interest rates and fees, fewer opportunities for loan forgiveness and more rigid repayment terms than federal loans. Federal loans come with greater benefits and financial protections than private student loans, so always exhaust federal loans, federal aid and scholarship options first. 

Is there any way to get out of private student loans? 

No, there isn’t any way to get out of federal or private student loans. Unlike most other types of debt, student loans can’t be eliminated through bankruptcy and may be sent to debt collection agencies if the borrower fails to pay. If the borrower avoids paying, their wages can be garnished. 

Who is eligible for a private student loan?

Most students are eligible for private student loans. Private student loan eligibility is based on creditworthiness and the lender’s underwriting. Most banks and other lending institutions require a minimum credit score, enrollment in an eligible college and U.S. citizenship or permanent residency. However, many students need a cosigner because they lack a strong credit history. 

Where can I shop for private student loans? 

You can shop for private student loans at various financial institutions, such as credit unions, banks and other for-profit lenders. Always shop around because private student loans vary in repayment terms, interest rates and cosigner requirements. Once you’ve applied, the lender works with your school to confirm eligibility and loan amounts.