When private student loans are a good option | Earnest

Private student loans: when are they a good option?

By Authors at Earnest | Published on March 30, 2026

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Financial aid, including scholarships, grants, and federal student loans, aren’t always enough for families to pay for college due to the rising cost of higher education. While free financial aid should always be exhausted first, private student loans¹ can be a helpful option for some borrowers. Here’s what you need to know about private loans and when they may make sense for you.

The difference between federal and private student loans

Federal student loans are funded and backed by the government. They offer certain benefits and protections, including fixed interest rates, flexible repayment plans², and potential loan forgiveness to eligible borrowers. Both undergraduate and graduate students can use these loans to help pay for tuition, books, and housing. However, there are limits on the amount that can be borrowed, depending on the loan type and year of study.

Private student loans, on the other hand, are offered by private lenders. Their terms and conditions, including interest rates, repayment plans, and fees, can vary significantly depending on the lender. Unlike federal loans, the amount you can borrow with a private loan depends primarily on your creditworthiness. You can learn even more about what private student loans are with this Earnest guide.

Generally, it’s recommended that students prioritize federal loan options over private loans due to the benefits and protections they offer. However, private student loans may be advantageous in certain situations.

When private loans can be a good option

When you need to bridge a funding gap

When federal student loans, which have annual and aggregate borrowing limits, don't cover the full cost of education, students may face a funding gap. While it’s recommended that students explore scholarships and work-study opportunities first, because they don't require repayment, private loans may help bridge the gap when other funding options are insufficient.

When you have excellent credit

Unlike federal loans, private student loan interest rates are not fixed, and credit scores are taken into account. This means that individuals with excellent credit scores or those who have a cosigner with excellent credit may qualify for lower interest rates with private student loans, compared to federal loans. This could lead to significant savings over the life of the loan.

When you’re looking for more flexible repayment terms

Unlike federal student loans, which typically have a standard 10-year repayment term, private student loans can offer borrowers greater flexibility by tailoring loan terms and interest rate structures to their specific financial situation. For example, private lenders may offer repayment terms as short as five years, which can result in lower overall costs with less interest accruing over time. They may also offer terms up to 20 years for borrowers who need longer repayment terms. However, it’s important to note that some private loan plans with shorter terms and lower rates may require repayment while a student is still enrolled.

When graduate loans have higher interest rates

Federal student loans for graduate programs typically have higher interest rates than undergraduate loans. Because of this, graduate students may find that private student loans offer a more favorable interest rate, especially for those who have a good credit score.

When private loans may not be the best option

While private student loans can be a helpful tool for some, they may not be the right solution for everyone. Due to the reliance on creditworthiness, private student loans can create a challenging financial burden in some scenarios.

If you have less-than-excellent credit

Individuals with lower credit scores will likely be approved for private loans with significantly higher interest rates than federal loans (or the rates offered to borrowers with good credit). These higher rates can result in substantial accrued interest, which makes repayment more difficult. If you need additional funding but don’t have great credit (or a cosigner), consider working on boosting your credit score before applying for a private loan.

If you’re pursuing a career in teaching or public service

Individuals working in public service or teaching in low-income schools may qualify for loan forgiveness. It is always recommended to explore federal aid options first, but this is especially important for those who may qualify for loan forgiveness in the future, as this option is unavailable with private loans.

If you may struggle with timely payments

Federal student loans provide borrowers with a safety net through income-driven repayment plans, deferment, and forbearance options in the event of financial hardship. These protections are typically limited or nonexistent with private loans. If a borrower with a private loan faces job loss or other financial difficulties, they may have fewer options to adjust their payments.

How to choose the right private loan

If private loans may make sense for you, it’s important to do your own research and compare lenders to ensure you’re getting terms that make sense for you. You’ll likely want to compare details like:

Learn more about Earnest’s private student loans

Earnest offers flexible repayment options and terms, a nine-month grace period³ (which is 25% higher than the standard six-month grace period offered by other lenders), and a 0.25% auto-pay discount⁴ to help save on interest. Find out if you’re eligible for a private student loan through Earnest and check your rates today.

About the Author

Authors at Earnest

We are a skilled team of design, math, finance, and technology geeks who noticed a lack of trust in the financial system and decided to do something about it. We also like to write articles to help clients with any financial challenge they may face.