How to Choose a Private Student Loan: 7 Factors to Consider 

The average amount a college-bound student borrowed from private lenders increased over 40% from $6,630 in 2022 to $9,337 in 2023. As college students turn to private student loans at increasing rates, it’s important to understand how to choose a private student loan1. Consider these seven factors to help you find the best private student loan to fit your needs.

How to pick the best private student loan

The average borrower takes around 20 years to pay off student loan debt. So when you commit to a private lender, you’re entering a relationship that can span decades. Here’s what you should look for, to make sure that relationship is a good one. (And psst, we even made an easy spreadsheet template for you to compare your options.)

1. Interest rates  

Maybe the most important factor to consider when you’re shopping for a private student loan is the interest rate and/or annual percentage rate (APR). Just a small decrease in interest rate can translate to thousands of dollars saved over the life of the loan, so it’s important to compare rates from a wide array of lenders. Remember that APR includes not just the interest rate but also any additional fees, so reviewing APRs can provide a more accurate picture of the cost of borrowing. 

You can also get a more accurate picture of what you might be offered by prequalifying. Prequalification with a student loan lender is a process that involves submitting some basic information about yourself to the lender, in exchange for an estimate of the rates and terms you may be eligible for. Prequalification, unlike a formal application for a student loan, does not affect your credit score. 

Generally there are two different types of student loan interest rates

  • Variable rates are interest rates that will change based on the economy. If national rates are high, you may want a variable rate so that when rates lower again, so will the interest rate on your student loan. However, there’s no guarantee rates will lower, or that even if they do lower, they won’t rise again. That makes variable student loans a little harder to plan for.
  • Fixed rates offer more predictable monthly payments. These are rates that will not change over the life of the loan, regardless of the national economy. However, if national rates are high when you borrow the loan, the fixed rates on your student will never drop, even if national rates do. Still, fixed-rate loans are generally seen as the safer, more predictable option. You can always refinance to a lower rate if national rates drop at any point2

2. Repayment terms 

Evaluate the repayment terms offered by various lenders, such as the length of the repayment period and whether they provide options for interest-only or deferred payments while you’re in school. Flexible repayment terms can make a big difference in managing your loan obligations once you graduate. A few key points to keep in mind: 

  • The longer your repayment term, the lower your monthly payment will be. However, a longer repayment period also means you’ll pay more in interest over the life of the loan.
  • Shorter repayment terms translate to higher monthly payments, but also less interest paid over the life of the loan. Use a student loan calculator to see how this works out with different interest rates and repayment terms.
  • Some lenders offer deferred payments while you’re in school at least half-time. This means you will not have to make payments until you graduate or fall below half-time enrollment. 
  • Private student loan lenders offer different grace periods. Usually, it’s six months, but some private lenders don’t offer one at all, while others offer a more generous nine-month grace period3.
  • Even if you’re eligible for deferred payments, interest will continue to accrue on your private student loan during school. When you graduate, that interest will capitalize, or in other words, be added to the principal balance. That means when you start repayment after the grace period is over, the interest you pay will be based on a higher student loan balance. If possible, try to make interest-only payments during school to keep your principal balance from ballooning by the time you graduate. 

3. Fees

With both federal and private student loans, expect to encounter fees when you borrow. Here are some common fees to watch out for:

  • Origination fees – A fee to process your loan. The federal government charges origination fees on all federal loans, but many private lenders do not.
  • Late fees – A fee for missing a payment or making a payment after the due date. These differ by lenders but you can generally find them on both federal and private student loans. Avoid them by setting up automatic monthly payments.
  • Returned payment fees – If you schedule a payment on autopay without enough money in your account to cover it, you could incur this fee. Keep enough cash in your account to cover your loan payments to prevent this charge.
  • Collections fees – If you make your payments on schedule, you won’t need to worry about this. But if you stop making payments, your loan could eventually be sent to a collections agency. Once your loan is in collections, you’ll likely owe a fee to the collections agency on top of your student loan payments.

4. Hardship options 

In an ideal world, you’d make on-time payments until your student loans were all paid off. But when the unexpected happens and you can’t afford your monthly payments, the federal government offers hardship options to their borrowers. 

  • Income-based repayment is a type of plan that caps your monthly payment at a percentage of your income, usually 15%.  
  • Forbearance allows borrowers to pause or lower their payments for a short amount of time, typically up to 12 months. Interest will still accrue on your loan during that time.
  • Deferment is similar in that borrowers can pause or lower their payments, but the length of time is longer (up to three years), and the loan does not accrue interest during that period. 

Though they’re not required to, some private lenders do offer unique hardship options. Earnest, the preferred private student lender of Going Merry, gives borrowers in good standing the opportunity to skip one payment4 during each 12-month period. Research the hardship options your potential lenders offer and decide how important this flexibility is to you. 

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5. Cosigner release 

A cosigner is someone who agrees to repay your student loan in the event you can’t. Most private student loan lenders require one if you’re applying for a loan, and even if they don’t, it’s a good idea to have one. That’s because private student loan rates are based on credit score, and student borrowers rarely have the credit score required to access a lender’s lowest rates. When you apply with a cosigner, the interest rate you’re offered will be based on your cosigner’s credit score, not yours. So do your best to find a financially stable adult close to you who’s willing to cosign your student loan. 

Once you’ve secured your cosigner, remember to ask your lender about cosigner release options. Cosigner release allows the cosigner, often a parent or guardian, to be released from their responsibilities after a certain number of on-time payments or when specific conditions are met. 

This can provide both your cosigner with peace of mind in the long run. Your student debt will be counted as their debt too, so it can impact their ability to take out other loans in the future –– like a mortgage for example. If they know you have a plan to remove them from your loan after graduation, they won’t have to worry about being saddled with your debt until it’s paid off in 5, 10, or even 20 years. 

6. Customer service and support 

Unresponsive customer service is the biggest “red flag” when shopping for a private student loan. For each private lender, prepare a few questions to call and ask their customer service center. Here are a few ideas:

  • What type of hardship options do you offer? 
  • Can I defer loan payments while I’m in school?  
  • Do you offer lower interest rates for borrowers with creditworthy cosigners? 
  • Do you offer cosigner release options?
  • Do you charge late fees? 
  • How long of a grace period do you offer? 

You’ll glean a lot about the lender from their customer support team. Are they eager to help? Are they rushing you off the phone? Can they answer your question? If not, do they connect you to someone who can? 

You don’t want to be in a situation where you need assistance from your lender that they can’t or won’t provide. Some companies invest extra time and money into creating an A+ customer service department because they know how impactful this support is during the repayment process. Find a lender with a supportive, knowledgeable, and eager-to-help customer support team.

7. Additional benefits and features

When evaluating very similar offers from two different lenders, it can help to weigh any additional benefits or features. Some lenders may offer loyalty rewards, interest rate reductions for autopayments, or even career assistance programs. Earnest, for example, may offer discounts for things like setting up autopay,5 as well as a grace period that’s three months longer than most other grace periods on average. Benefits like these can potentially save you money or provide valuable resources during and after your education.

Steps to take before you borrow a private student loan

Private student loans might be the missing puzzle piece that helps you afford your college degree. Before you turn to them, however, you should take these steps.

Max out your federal student aid

Before you take out a private student loan, you should always maximize your eligibility for federal student aid. Fill out the Free Application for Federal Student Aid (FAFSA®) to make yourself eligible for grants, scholarships, work-study programs, and federal loan options. Federal grants and scholarships are money you don’t need to pay back, and federal loans often offer more favorable terms than private loans. These include fixed interest rates, forgiveness options, and income-driven repayment plans.

30% of college-bound students didn’t fill out the FAFSA® and missed out on valuable financial aid simply because they didn’t have enough information to complete the application.

Apply for private scholarships and grants

Filling out the FAFSA® will make you eligible for federal and school-specific scholarships, but those aren’t the only awards you can tap into. Private scholarships are open to anyone who meets the eligibility requirements, and just like federal scholarships and grants, private scholarships don’t need to be paid back. They’re essentially “free money” that can help lower your overall education expenses. By winning scholarships, you can reduce your reliance on loans and potentially avoid accumulating excessive debt. And if you think you have to be a star athlete or student to earn one, think again. There are scholarships for all types of students.

Improve your credit score

Your credit score is crucial information for a lender because it signals your ability to manage debt. So, the terms (like interest rate and repayment period) for a private student loan will be dependent on this number. If you don’t have much credit history or your score isn’t great, take steps to improve it

If you need to raise your score quickly, use a tool like Experian Boost. This free service gives you credit for making on-time payments for things you might already be paying for, like gas or Netflix. Another easy strategy is to analyze your credit report and dispute any errors. Mistakes can be anything from an incorrect name to an incorrectly listed payment date. According to CNBC, almost a third of Americans find an error on their credit report, so check yours before you apply for a private student loan. 

Find a cosigner

If you have subpar credit, a creditworthy cosigner can improve your odds of approval and help you access a lower interest rate. Remember that your cosigner will share equal responsibility for loan repayment. So, if you miss a payment or submit one late, your actions will affect both your credit score and your cosigner’s credit score. 

Most college students have a parent or guardian cosign their loans. But if your parents can’t or don’t want to cosign, consider other responsible adults with whom you have a close relationship ––  like a grandparent, aunt or uncle, or mentor. An ideal cosigner will be someone close to you who has a good income, little debt, and a healthy credit score (670+). Asking someone to cosign your loan is not a small favor, so approach the request with respect and gratitude. If you can, avoid using services that match you with a cosigner for a fee. 

Know exactly how much you need to borrow 

Never borrow more than the amount of money you need for school. You’ll be paying your loans back with interest, so the less you borrow, the less you’ll owe. Private student loans can be used for any “educational expenses.” This means bills like tuition, room & board, meal plans, books, and other school supplies. Depending on what you’re studying, your educational expenses might include even more. But try not to spend your borrowed money on things you don’t absolutely need for your degree. 

Because of interest, the amount you borrow will have an enormous impact on how much you repay. For example, if you borrow $10,000 at a 5% fixed interest rate and pay it back over 20 years, you pay $66 per month, totaling $15,838.94 at the end of your loan –– $10,000 in principle, and $5,838.94 in interest*.

But if you borrow $15,000 at the same fixed interest rate with the same repayment schedule, you’ll pay $98.99 every month, totaling $23,758.41 at the end of your loan term –– $15,000 in principal and $8,758.41 in interest. So borrowing an extra $5,000 doesn’t just result in paying back an extra $5,000, but instead an extra $7,919.47 once interest is factored in*.

*Rate and payment example listed above is for illustrative purposes only and may not be representative of rates or terms offered by Earnest.

Get matched to scholarships with Going Merry

Choosing a private student loan is a serious financial decision. Picking a lender means entering into a relationship that can potentially span decades, so it’s important to weigh all the factors before committing. By doing thorough research and comparison shopping, you can find a loan that aligns with your educational goals and sets you up for financial success in the future. Remember, borrowing responsibly and being proactive in managing your student loans can greatly alleviate the stress of repayment.

Another way to avoid the stress of repayment is to forgo student loans altogether. Going Merry curates lists of high-quality scholarships and matches you to ones you’re already eligible for. That way, you can spend less time searching for awards and more time applying to boost your odds of winning. Get started today.

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Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

1 Before applying for private student loans, it’s best to maximize your other sources of financial aid first.  It’s recommended to use a 3-step approach to assembling the funds you need: 1) Look for funds you don’t have to pay back, like scholarships, grant, and work-study opportunities.  2) Next, fill out a FAFSA(R) form to apply for federal student loans.  Federal Direct subsidized and unsubsidized loans, excluding PLUS Loan for Parents and PLUS Loan for Graduate and Professional Students which require a credit check and a credit worthy endorser if the parent or graduate or professional student has adverse credit, do not require a credit check or cosigner, and offer various protections if your struggling with your payments.  3) Finally, consider a private student loan to cover any difference between your total cost of attendance and the amount not covered in steps 1 and 2.  For more information, visit the Department of Education website at

2 You may lose benefits associated with your underlying federal and/or private loans if you refinance such as federal Income-driven Repayment Plans, Economic Hardship Deferment, Public Service Loan Forgiveness, or other deferment and forbearance options. If you file for bankruptcy, you may still be required to pay back this loan.

3 Nine-month grace period is not available for borrowers who choose our Principal and Interest Repayment plan while in school.

4 Earnest clients may skip a payment through a one, one-month forbearance during a 12 month period. Your first request to skip a pay can be made once you’ve made at least 6 months of consecutive on-time full principal and interest payments, and your loan is in good standing. The interest accrued during the skipped month will result in an increase in your remaining minimum payment. The final payoff date on your loan will be extended by the length of the skipped payment periods. Any unpaid accrued interest may capitalize (added to the principal balance) at the end of the forbearance period by adding unpaid accrued interest to the outstanding principal as permitted by law and the terms of the loan agreement. 

5 You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment from a checking or savings account. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay. It is important to note that the 0.25% Auto Pay discount is not available while loan payments are deferred.

Earnest Private Student Loans are made by One American Bank, Member FDIC, or FinWise Bank, Member FDIC. One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104. Finwise Bank, 756 East Winchester, Suite 100, Murray, UT 84107.

Earnest loans are serviced by Earnest Operations LLC, 535 Mission St., Suite 1663 San Francisco, CA 94105, NMLS #1204917, with support From Navient Solutions, LLC (NMLS #212430). One American Bank, FinWise Bank, and Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by agencies of the United States of America. 

© 2024 Earnest LLC. All rights reserved.


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