As federal aid for college shrinks, here’s what to look for in a private student loan

Graduate students will be particularly impacted, according to Robert Farrington, a personal finance expert and founder of The College Investor.

“Previously, graduate students could take out Graduate PLUS loans up to the cost of attendance,” Farrington told CNBC Select. “That program is ending, though, and now federal Direct Unsubsidized Loans for grad students will be capped for the first time ever. There’s going to be a huge influx of [private] borrowing simply because of those annual caps.”

Undergraduates will also be affected by the new regulations, Farrington added, though less directly.

Anyone unable to cover the complete cost of education with federal loans, grants, scholarships, work-study or savings will probably need private loans to cover the shortfall. That’s especially true with the new restrictions on federal aid.

• Families that need to fill funding gaps after exhausting federal aid
• Students attending high-cost universities
• Graduate and professional students affected by new federal borrowing caps

Federal student loan interest rates for 2026-2027

Compare at least three to five lenders before signing a loan, looking at factors such as:

2. Fees and penalties: Most private lenders don’t charge origination fees, but other charges to consider include:

• Late payment fees, if you miss a payment
• Returned payment (NSF) fees, if your payment is declined due to insufficient funds
• Collection costs, if a loan is delinquent or in default

3. Co-signer requirements: For borrowers with poor or limited credit, lenders typically require a creditworthy co-signer. If that’s a challenge for you, some lenders use alternative underwriting criteria when making approval decisions. If you are applying with a co-signer, find out about co-signer release policies: Some lenders will let you relieve your co-signer after just six or 12 payments. Others require 24 or more payments — or don’t allow you to release a co-signer without refinancing.

Repayment terms: There are typically four repayment options available from private lenders

• Immediate repayment: Full principal and interest payments begin as soon as the loan is approved.
• Interest-only payments: You pay only the accrued interest while you’re enrolled.
• Fixed monthly payments: You pay a small flat monthly payment while in school.
• Deferred repayment: Payments are postponed until after graduation or your grace period ends, though interest typically continues to accrue.

Hardship options: Private loans generally lack the robust borrower protections of federal student loans, but lenders may offer some financial assistance, so compare options before borrowing. Options include:

• Temporary deferment or forbearance if you’re unemployed, returning to school, entering military service or facing a medical illness.
• Interest-rate reductions, interest-only payments, modified repayment plans or loan modifications.
• Loan discharge after death or disability.

Legal judgments and reviews: “Look at the Consumer Financial Protection Bureau and see if the lenders ever had any actions taken against them,” Mayotte said. “Definitely look at the reviews and see what other borrowers have to say.”

Account benefits: Private lenders often offer rate reductions for enrolling in autopay or having a separate deposit account. SoFi gives eligible borrowers with a 3.0 GPA a $250 cash bonus once every academic year.

Broader eligibility: Students generally must be enrolled at least half-time to qualify for federal aid. Some private lenders, like Sallie Mae, provide financing to students enrolled in fewer credit hours. International students with a U.S.-based co-signer can also secure private funding.

No origination fees: Private student loans generally don’t have origination fees, while undergraduate Direct Subsidized and Unsubsidized Loans come with a fee of 1.057%, and 4.228% is tacked onto Parent and Graduate PLUS loans.

Refinancing options: Federal student loans can only be refinanced by converting them into private refinance loans, losing those federal hardship protections. Not all lenders will even refinance federal student loans, but refinancing options for private student loans are abundant. Earnest approves FICO Scores as low as 580 and lets you add a co-signer to improve your chances.

While private loans have their merits, Mayotte urges her clients to avoid them if possible. “Federal loans have a lot of safety nets that private loans just don’t.”

Credit-based approval: Unlike federal loans, private lenders evaluate borrowers’ creditworthiness. According to a March 2026 report by the consumer advocacy group Protect Borrowers, 40% of Americans wouldn’t be approved for most private student loans due to credit and income requirements.

Co-signer requirements: Over 90% of private student loans require a co-signer, according to the Higher Education Servicing Corporation, forcing you to find someone willing to be legally responsible for your debt if you fail to make payments.

Higher borrowing costs: If you have limited or bad credit, the rate you’re offered is almost certainly going to exceed federal rates, which are mandated by Congress. Private student loan rates are reaching 18%, according to Bankrate, compared to 6.52% to 9.07% for federal loans in 2026-2027.

Fewer protections: Private lenders have much stricter standards for deferment and forgiveness, and rarely offer income-driven repayment plans. (RISLA is the only one we’ve found.) Private loans would also be ineligible for any other government-sponsored loan forgiveness efforts.

Although there are obvious similarities, the student loan application process is somewhat different from applying for a personal loan or a mortgage.

1. Check your credit score: Approval and rates for private student loans are credit-based, so it’s important to know where you stand before you start shopping. If you’re a young student with weak or nonexistent credit, you’ll probably need a creditworthy co-signer.

2. Compare lenders: Check rates, terms, fees, hardship options and co-signer release rules from a variety of sources. Student loan marketplace Credible will let you compare offers from up to a dozen vetted lenders at once.

3. Get pre-qualified and choose your lender: Many lenders offer pre-qualification with a soft credit inquiry, so you can get an estimated personalized rate before formally applying.

4. Gather documents: Requirements vary, but you’ll typically need:

• Social Security number
• Government-issued ID
• Income and employment info (for you or your co-signer’s)
• Your school name, degree program and estimated graduation date
• Proof of enrollment (such as an acceptance letter or enrollment verification)
• Cost of attendance and/or financial aid award letter

5. Submit your application: You should be able to apply directly on your lender’s website. (This will trigger a hard credit inquiry that will temporarily lower your credit score several points.) If you are applying with a co-signer, they’ll need to fill out a portion of the application.

6. Get school certification: If you’re approved, the lender will contact your school to verify your enrollment and confirm that the requested loan amount doesn’t exceed your cost of attendance.

7. Review and accept your loan: Once the school certifies the loan, the lender will provide you with a final Truth in Lending disclosure. It will include your loan terms, including:

• The approved loan amount
• The APR (and whether it’s fixed or variable)
• A breakdown of applicable fees
• Your total repayment estimate
• Your monthly payment amount, the total number of payments and the date your first payment is due
• An acknowledgment of your right to cancel within three days of acceptance.

You (and your co-signer, if you have one) must electronically sign and accept the terms to finalize the loan.

8. The funds are disbursed: Typically, funds are sent directly to your school to cover tuition, campus housing, meal plans and related costs. Any leftover money is sent to you to cover books, off-campus housing and other expenses. The funds are often split into two disbursements — one for the fall semester and one for the spring.

Mayotte encourages borrowers to conceive of their debt in terms of monthly payments, not just the total loan amount.

“I don’t care how financially savvy somebody is,” she said. “For some reason, having in your head, ‘Oh, I’m going to owe $100,000 in student loans,’ isn’t as impactful as saying, ‘I’m going to owe [X dollars] a month, every month, for 10 years.”

Your projected monthly student loan payments shouldn’t exceed 10% of your expected gross monthly income. With that $63,000 salary, your maximum would be $525 per month.

Another method suggested by Mayotte is to take the amount you think you’ll need for a single year and multiply it by five. (“Quite a few students take five years to finish college, and also costs increase a lot over time,” she said.) Use an online student loan calculator to plug in your term and interest rate to see what that means for a monthly payment.

“See if that’s something you can live with,” Mayotte said.

Federal student loan programs will have new borrowing limits and repayment options beginning July 1, 2026.

Key changes include:

• Parent PLUS loans: Families were previously able to borrow up to the full cost of attendance (minus other financial aid) for a dependent undergraduate student’s education. New Parent Plus borrowers will now be limited to $20,000 per student annually, with a $65,000 lifetime limit per student.
• Graduate PLUS loans: Graduate PLUS loans will not be available to new borrowers. Historically, graduate and professional students could borrow up to the full cost of attendance with no fixed annual or lifetime limits. If you took out Graduate PLUS loans before July 1, 2026, you may continue borrowing for up to three additional years or until you complete your program, whichever comes first.
• Direct Unsubsidized Loans: Graduate borrowers are being limited to $20,500 per year with a lifetime limit of $100,000. Borrowers in eligible professional programs, like law school, medical school or an MBA program, will be limited to $50,000 per year, with a lifetime limit of $200,000. Students enrolled less than full-time (typically 8 or 9 credits per semester) will have their loan limits reduced in proportion to their credit load.
• Income-driven repayment (IDR) plans: Existing IDR plans, such as PAYE, ICR, and SAVE are being phased out in favor of the Repayment Assistance Plan (RAP), which offers forgiveness after 30 years of qualifying payments.
• New lifetime limit: A $257,500 lifetime limit will apply to combined Federal Direct Subsidized and Unsubsidized Loans for undergraduate, graduate, and professional studies. While Parent PLUS loans are excluded, Grad PLUS loans will count toward this limit.

AtCNBC Select, we work with experts who have specialized knowledge and authority, grounded in relevant training and/or experience. For this story, we interviewed personal finance expert Robert Farrington. Robert is the founder of The College Investor, a site dedicated to helping college students and young adults get out of student loan debt, improve their personal finances and start investing.

We also spoke with Betsy Mayotte, founder of The Institute of Student Loan Advisors, a nonprofit that
provides free advice and assistance to borrowers. Betsy has been in the student loan industry for over 20 years and has helped thousands of borrowers with their student loans.

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