Federal loans come from the U.S. Department of Education, not banks
The largest student loans in the United States are federal loans, and they do not come from banks at all. The U.S. Department of Education lends directly to students through programs like Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans. You apply through the Free Application for Federal Student Aid (FAFSA), and the money flows from the federal government to your school's financial aid office.
Banks do not originate federal student loans anymore. Until 2010, private banks made federal loans under a program called the Federal Family Education Loan (FFEL) Program, but the government ended that arrangement and now handles all federal lending directly. If you took out federal loans before 2010, your servicer might be a bank or loan company, but they are collecting payments on a loan the government originally made.
Key Takeaways
- Federal student loans come directly from the U.S. Department of Education, not from banks, and you apply through the FAFSA.
- Private student loans come from banks, credit unions, and online lenders, and require a credit check or a creditworthy cosigner.
- Private lenders set their own interest rates and terms, which vary widely based on your credit score and the lender's policies.
- Federal loans have fixed interest rates set by Congress and offer protections like income-driven repayment and forbearance that private loans do not.
- Most students should exhaust federal loan options before considering private loans, because federal loans have lower rates and more flexible repayment terms.
Private banks and lenders that offer student loans
Private student loans come from banks, credit unions, and online lending companies. The major banks offering private student loans include Sallie Mae (the largest private student lender), Wells Fargo, Discover, and PNC Bank. Credit unions like Connexus Credit Union and Pentagon Federal Credit Union also offer private student loans to their members. Online lenders such as CommonBond, Earnest, and SoFi also make private student loans.
Each lender sets its own interest rates, repayment terms, and borrowing limits. A private loan from one lender might have a 6% interest rate while another charges 10%, depending on your credit score, income, and whether you have a cosigner. Private lenders typically require a credit check, and if your credit is limited or poor, you will need a cosigner—usually a parent or relative with established credit—to be approved.
Private loans are not the same as federal loans. You do not apply through the FAFSA. Instead, you go directly to the lender's website or visit a branch, provide financial information, and wait for a credit decision. The process usually takes a few days to a week.
How private loan interest rates and terms differ by lender
Private lenders compete on interest rates, fees, and repayment flexibility. Some offer variable interest rates that change with the market; others offer fixed rates that stay the same for the life of the loan. Variable rates start lower but can rise over time. Fixed rates are higher upfront but predictable.
Repayment terms vary too. Some lenders let you defer payments while you are in school; others require you to make interest-only payments during school. After graduation, most private loans require full principal and interest payments over 5 to 20 years, depending on what you choose at the time you borrow.
Fees also differ. Some lenders charge an origination fee (a percentage of the loan taken upfront), while others do not. A few offer small discounts if you set up automatic payments or if you are a customer of their bank. Always compare the total cost of borrowing, not just the interest rate.
When private loans make sense versus federal loans
Federal loans should be your first choice because they have fixed interest rates set by Congress (currently 5.5% to 8.5% depending on the loan type), and they offer protections private loans do not. Federal loans include income-driven repayment plans, which cap your monthly payment at a percentage of your income. They also offer forbearance and deferment options if you lose your job or face hardship. Federal loans can be forgiven after 20 to 25 years of payments under income-driven plans, or after 10 years if you work in public service.
Private loans have none of these protections. If you lose your job, your lender is not required to lower your payment. Private loans do not offer income-driven repayment or public service forgiveness. You should only borrow private loans after you have borrowed the maximum federal loan amount available to you and still need more money for school.
Private loans can make sense if you are borrowing a small amount for a short-term program, or if you have excellent credit and can get a much lower interest rate than the federal rate. But for most undergraduate students, federal loans are the better deal.
How to find out what private loans you might may have access to for
Most private lenders have online prequalification tools on their websites. You enter basic information—income, credit score, school, and loan amount—and the lender tells you what rate and terms you might receive. This is not a binding offer, but it gives you a sense of what you would pay.
You can prequalify with multiple lenders to compare rates. Doing this within a short window (usually 14 to 45 days, depending on the credit bureau) counts as a single inquiry on your credit report, so it does not hurt your score. After you prequalify, you can move forward with a full application if the terms look good.
If you have limited credit or a low credit score, ask whether the lender allows a cosigner. Many do, and a cosigner with good credit can lower your interest rate significantly. Your cosigner is legally responsible for the loan if you do not pay, so choose someone you trust and who understands the commitment.
What happens if you cannot repay a private student loan
Private student loans are not forgiven if you die or become permanently disabled, though some lenders offer optional disability discharge insurance you can buy at the time you borrow. If you fall behind on payments, the lender can report you to credit bureaus, damage your credit score, and eventually sue you or garnish your wages. Private loans cannot be discharged in bankruptcy except in rare cases where you can prove undue hardship.
If you are struggling with private loan payments, contact your lender immediately. Some offer temporary payment reductions or forbearance, though they are not required to. Refinancing to a different lender is another option if your credit has improved since you borrowed, though refinancing resets the clock on your repayment timeline.
Federal loan servicers versus private lenders
If you have federal loans, you do not deal with the Department of Education directly for payments. Instead, a loan servicer handles billing and customer service. Common federal loan servicers include Mohela, Nelnet, Great Lakes, and Aidvantage. These companies collect your payments and answer questions, but they do not own your loans—the government does. This matters because servicers can change, but your loan terms stay the same.
With private loans, the lender you borrow from is the one you pay. They set the terms, handle billing, and make decisions about whether to offer forbearance or other help. There is no intermediary between you and the lender.
Frequently Asked Questions
Can I get a private student loan without a cosigner?
Yes, but only if you have an established credit history and a good credit score—usually 650 or higher. Most lenders require a cosigner if your credit is limited or poor. Some lenders are more flexible than others, so it is worth checking multiple lenders' prequalification tools to see what you might receive on your own.
What is the difference between a fixed and variable interest rate on a private loan?
A fixed rate stays the same for the entire life of the loan, so your payment is predictable. A variable rate starts lower but changes periodically based on market conditions, which means your payment can go up. Fixed rates are usually higher upfront but safer if you plan to keep the loan for many years.
Can I refinance a private student loan to a different lender?
Yes. If your credit has improved since you borrowed, you may may have access to for a lower interest rate from a different lender. Refinancing means taking out a new loan to pay off the old one. Keep in mind that refinancing resets your repayment timeline, so you might pay more interest overall even if your rate is lower.
What happens to my private student loan if I die?
Most private loans become the responsibility of your estate or cosigner. Unlike federal loans, private loans are generally not forgiven upon death unless you purchased optional disability or death insurance at the time you borrowed. Check your loan documents or contact your lender to see what protections, if any, are included.
Should I borrow private loans if federal loans are available?
No, not unless you have exhausted your federal loan options. Federal loans have lower interest rates, fixed terms, and protections like income-driven repayment and public service forgiveness. Private loans should be a last resort because they offer fewer protections and can be more expensive over time.