13 Myths busted about private student loans

Private student loans often get a bad reputation, but they aren’t inherently dangerous. While federal loans should usually be your first stop, private options can be a powerful tool for filling funding gaps when used responsibly. The key is separating fact from fiction so you can make borrowing decisions that support your educational goals without unnecessary fear.

It is easy to see why confusion persists. Scary headlines often highlight extreme cases of unmanageable debt, and well-meaning advice from friends or family may be based on outdated information. Consequently, many students and parents assume private lending is predatory or strictly for those with perfect credit. This fear can lead families to overlook a viable resource that could make college accessible, or worse, turn to higher-interest alternatives like credit cards to cover the bill.

This guide is here to clear the air. You’ll learn the truth behind the 13 most common myths about private student loans—covering everything from eligibility requirements and interest rates to repayment flexibility and application timing. By understanding the reality of how these loans work, you can move past the stigma and confidently build a complete funding strategy that fits your specific financial situation.

Before we bust these specific myths, however, we need to establish exactly where private loans fit into the broader financial aid landscape.

Context: how private student loans actually work

Private student loans are credit-based funds provided by banks, credit unions, and online lenders rather than the federal government. While federal Direct Loans are entitlements based primarily on FAFSA data, private loans are consumer financial products that require an application and credit review to determine eligibility.

The most critical distinction lies in how these loans are approved. Federal student loans generally offer standard terms to every student regardless of financial history. In contrast, private lenders use “underwriting”—a process that evaluates the borrower’s (and often a cosigner’s) credit score and debt-to-income ratio to determine eligibility and interest rates. This means that students with strong credit profiles—or those with creditworthy cosigners—may secure competitive rates, while others may face higher costs or denial.

Because of these differences, private loans function primarily as “gap financing.” They are designed to cover tuition, room, and board only after you have exhausted grants, scholarships, and federal loans. According to Betsy Mayotte, President of The Institute of Student Loan Advisors, “In general, federal loans should be your first stop, but private loans can be appropriate when you’ve maxed out your federal eligibility.”

This strategic usage is common; according to the College Board, private loans account for approximately 13% of undergraduate student debt as of October 2024. For a full breakdown of features and lenders, review our comprehensive guide to private student loans. With this foundation established, readers are ready to examine the specific myths that often deter families from utilizing this option effectively.

Quick reference: private vs. federal loans at a glance

Before examining the specific myths, it is helpful to see exactly how these two funding sources compare side-by-side. While federal loans offer standardized protections and “one-size-fits-all” terms, private loans function as marketplace products where terms vary based on your financial strength. Understanding these structural differences is essential for building a funding strategy for the 2025–2026 academic year.

Source: StudentAid.gov and private lender aggregates (rates and fees effective July 1, 2025–June 30, 2026).

This comparison highlights that while federal loans offer unique safety nets, private loans can provide competitive terms for those who qualify. According to Mark Kantrowitz, financial aid expert, “Private loans can be a good option when federal loans don’t cover the full cost of attendance.” With these fundamental differences established, we can now address the specific misconceptions that often cloud borrowing decisions.

Eligibility and credit myths (myths 1-4)

One of the biggest barriers to accessing education financing is the fear of rejection. Many students and families assume private loans are reserved exclusively for the wealthy or those with flawless financial histories. While private lenders do assess risk more strictly than the federal government, the eligibility criteria are often more flexible than families realize. By understanding the actual requirements, you can determine if a private loan is a viable option for your funding strategy.

The Truth: You generally need “good” credit, not perfection. While the most competitive interest rates are reserved for those with excellent credit scores (typically 780+), many lenders approve applicants with FICO scores in the mid-to-high 600s. A common minimum threshold is around 660 to 670, though this varies by lender.

It is important to remember that approval isn’t just about the score itself; lenders also look at credit history length and payment reliability. If a student has a “thin” credit file (little to no history), they aren’t necessarily rejected for bad credit—they just need a creditworthy partner to strengthen the application.

The Truth: Lenders do not expect full-time students to hold full-time jobs. They understand that your primary “job” is earning a degree. Instead of rejecting students for lack of income, the private lending market relies heavily on cosigners—parents, guardians, or other creditworthy adults who agree to take equal responsibility for the loan.

According to Mark Kantrowitz, financial aid expert, “Most students will need a cosigner to qualify for a private student loan.” Adding a cosigner allows the lender to evaluate the cosigner’s income and debt-to-income ratio rather than the student’s, making approval possible even for an 18-year-old with no employment history. For more details on how this partnership works, review our guide to applying with a cosigner.

The Truth: While federal student loans are generally restricted to U.S. citizens and eligible noncitizens, the private market is more expansive. Many U.S. lenders offer loans for international students, provided they have a creditworthy cosigner who is a U.S. citizen or permanent resident.

The cosigner provides the security the lender needs, allowing the international student to access competitive rates comparable to domestic students. A select few lenders even offer loans to international students without a cosigner, though these typically require high future earning potential and may carry higher interest rates.

The Truth: Eligibility for students with Deferred Action for Childhood Arrivals (DACA) status has improved significantly in recent years. While they are ineligible for federal financial aid, several major private lenders explicitly welcome DACA recipients. Like international students, DACA borrowers typically need a U.S. citizen or permanent resident cosigner to qualify, though specific documentation requirements (such as a valid Social Security number) will vary by lender.

Now that we have clarified who can qualify, the next logical question involves the price tag. Many families avoid private loans because they believe the costs are astronomically high compared to federal options—a belief we will examine in the next section.

Interest rate and cost myths (myths 5-7)

Once you understand that eligibility is within reach for many families, the conversation naturally shifts to cost. A pervasive fear is that private lenders charge predatory interest rates and stack on hidden fees that make borrowing prohibitively expensive. While this can be true for high-risk borrowers or predatory lenders, the reputable private student loan market is often far more competitive than families expect—especially when compared to federal options for parents and graduate students.

The Truth: This is not a universal rule. While federal Direct Loans for undergraduate students generally offer the lowest rates available, the story changes significantly when looking at Federal PLUS loans. For parents and graduate students with strong credit profiles, private student loans can often offer lower interest rates than the federally set PLUS rate.

As shown in the comparison table above, federal rates are fixed by Congress and apply to everyone regardless of credit score. In contrast, private lenders reward high credit scores with lower rates. If you or your cosigner have a credit score in the high 700s or 800s, you may qualify for a fixed rate that undercuts the federal PLUS option, potentially saving thousands of dollars over the life of the loan. To see where you stand, it is worth checking your personalized estimates.

Compare rates from 8+ lenders

The Truth: Surprisingly, federal loans often carry higher upfront fees than their private counterparts. According to StudentAid.gov, the federal government charges an “origination fee” on every loan, which is deducted from the loan balance before the funds are even sent to the school. For disbursements made between October 1, 2024 and September 30, 2025, the origination fee for Federal Parent PLUS loans is 4.228%.

This means if a parent borrows $20,000 to cover tuition, the government keeps approximately $845, sending only $19,155 to the college. You are still responsible for repaying the full $20,000 plus interest. Conversely, the vast majority of reputable private lenders charge $0 in origination fees, application fees, or prepayment penalties. What you borrow is exactly what is disbursed to the school.

The Truth: Variable rates are not inherently “bad”; they are a strategic tool that carries both risk and potential reward. Variable rates fluctuate with market indices (like SOFR), meaning your payment can go up or down. However, these loans often start with a lower initial rate than fixed-rate options.

According to Mark Kantrowitz, financial aid expert, “Private loans can offer variable interest rates, which may be lower than federal fixed rates initially.” For borrowers who plan to pay off their debt aggressively—or for those borrowing during a period of declining interest rates—a variable rate can result in significant savings. Furthermore, most reputable lenders include a legitimate “rate cap” in the contract, ensuring the interest rate can never exceed a specific limit (often around 18-25%, though rarely reached in practice).

For a deeper dive into how these rates function and how to choose between them, read our guide to student loan interest rates. With the costs clarified, we must next address the myths surrounding what happens after graduation—specifically regarding repayment flexibility and forgiveness.

Repayment and flexibility myths (myths 8-10)

While interest rates and fees dominate the upfront conversation, many families hesitate to use private loans because they worry about the long term. There is a common perception that private lenders are rigid, unforgiving institutions that demand payment regardless of life circumstances. While it is true that federal loans offer the most robust safety net, the private market has evolved significantly, offering more flexibility and borrower protections than most people realize.

The Truth: Private lenders are not immune to the reality that borrowers sometimes face financial hardship. While private loans do not offer the specific Income-Driven Repayment (IDR) plans or Public Service Loan Forgiveness (PSLF) found in the federal system, reputable lenders typically offer their own versions of forbearance and deferment.

Most major lenders have programs to pause payments temporarily if a student goes back to graduate school, enters military service, or experiences involuntary unemployment. Some lenders even offer temporary payment modification programs that allow for reduced payments during periods of financial distress. However, unlike federal entitlements, these are often discretionary policies outlined in the contract. It is essential to read the fine print, but you should not assume that a private loan leaves you with zero options during an emergency.

The Truth: A cosigner is not necessarily a permanent attachment to the loan. One of the most distinct features of modern private student loans is “cosigner release.” This provision allows the primary borrower (the student) to apply to remove the cosigner from the loan obligation after meeting specific criteria, such as graduating and making a set number of on-time payments.

According to Mark Kantrowitz, financial aid expert, “Cosigner release is a valuable feature offered by some private lenders, rewarding responsible repayment.” Typically, lenders require 12 to 48 consecutive on-time payments and a credit review to ensure the student can support the debt independently. This protects parents’ credit long-term and allows students to take full ownership of their financial future. For more on how to navigate this process, read our guide to cosigner release requirements.

The Truth: The “grace period”—the time between leaving school and your first bill due date—is not exclusive to the government. Nearly every major private student loan lender offers a grace period that matches the federal standard of six months. Some lenders even extend this to nine months to give graduates extra time to secure employment.

It is important to note, however, that interest usually continues to accrue during this grace period for private loans, just as it does for unsubsidized federal loans. While you aren’t required to make payments immediately after walking across the graduation stage, making small, interest-only payments during this time can prevent your balance from growing before full repayment begins. For a detailed breakdown of repayment timelines, review our student loan repayment guide.

With a clearer understanding of how repayment works, the final piece of the puzzle is the application process itself. Many families scramble at the last minute because of misconceptions about how long approval takes and when they should apply.

Application and timing myths (myths 11-13)

With a clearer understanding of how repayment works, the final piece of the puzzle is the application process itself. Many families scramble at the last minute because of misconceptions about how long approval takes and when they should apply. By understanding the timeline and mechanics of modern lending, you can secure funding without unnecessary stress.

The Truth: You do not need to wait until you receive your final tuition bill to start shopping for rates. While you should certainly file the FAFSA and accept all federal aid before finalizing a private loan, you can (and should) check your eligibility and estimated rates as soon as you have a general idea of your funding gap.

Most lenders allow you to “pre-qualify” using a soft credit check, which allows you to see potential interest rates without impacting your credit score. This gives you the power to compare options early—often in the spring or early summer—so you aren’t rushing to find a lender weeks before the semester begins. Once your financial aid offer is official, you can adjust the final loan amount before signing the promissory note.

The Truth: The days of waiting by the mailbox for a bank decision are largely over. Modern private lenders use automated underwriting systems that can provide a credit decision in minutes. If your application is complete and documentation (like proof of income or ID) is readily available, the initial approval process is incredibly fast.

However, “approval” is different from “disbursement.” After you sign the loan documents, the lender must send the loan details to the college for certification (verification of enrollment and loan amount). This school certification process typically takes 2 to 4 weeks depending on the time of year. To ensure funds arrive by the start of the term, it is best to apply at least 30 days before tuition is due.

See your estimated rate with a soft credit check

The Truth: A private student loan is not a life sentence. Just because you borrow from one lender for your freshman year doesn’t mean you must use them for all four years, nor does it mean you are stuck with that specific interest rate until the loan is paid off.

Borrowers can—and often do—refinance their student loans after graduation. Refinancing involves taking out a new loan with a private lender to pay off existing debt, ideally at a lower interest rate or with better terms. This is particularly effective for graduates who have improved their credit score or income since they first applied. If you find yourself with high-interest debt down the road, you can explore options to refinance your student loans to reduce costs.

With these 13 myths busted, the landscape of private student loans should look far less intimidating. The question now shifts from “Are these loans safe?” to “How do I choose the right one for my situation?”

Making smart private loan decisions

Now that you can distinguish myth from reality, the goal is to turn that knowledge into a concrete funding strategy. Private student loans are neither inherently “good” nor “bad”—they are financial tools that can be effective when used correctly or burdensome when used recklessly. The smartest approach is to treat a private loan as the final piece of your financial aid puzzle, used strictly to fill the gap between your cost of attendance and your available federal aid.

To ensure you are borrowing responsibly for the 2025–2026 academic year, avoid the common pitfall of accepting the first offer you receive. Lenders compete for your business, and terms can vary significantly based on your credit profile. Use this decision framework to navigate the process with confidence.

• Exhaust federal options first: Always max out federal Direct Subsidized and Unsubsidized Loans before applying elsewhere. They offer income-driven repayment plans and forgiveness potential that private lenders generally cannot match.
• Do the math on Parent PLUS: If you are a parent, compare the current federal PLUS interest rate (plus the 4.228% origination fee) against private loan offers. If you have excellent credit, a private loan might offer a lower Annual Percentage Rate (APR).
• Shop with “soft pulls”: Apply with at least three different lenders to compare rates. Reputable lenders use a soft credit check for pre-qualification, meaning your credit score won’t be impacted until you formally accept a loan.
• Scrutinize the APR: Don’t just look at the interest rate; look at the APR. This figure represents the total cost of borrowing, including any potential fees. Avoid lenders who are not transparent about these costs.
• Plan for interest payments: Whenever possible, choose a repayment plan that allows you to make small, interest-only payments (e.g., $25/month) while in school. This prevents the balance from ballooning before graduation.

Be wary of red flags such as lenders who promise approval without a credit check or those who pressure you to borrow more than your certified cost of attendance. A legitimate lender will always certify the loan amount with your school to ensure you aren’t over-borrowing. By following this checklist, you can secure the necessary funds while minimizing long-term costs.

Even with a solid plan in place, you may still have lingering questions about specific scenarios. Below, we address the most frequently asked questions to help finalize your decision.

FAQs about private student loan myths

Even after busting the biggest myths, specific questions often remain about how these loans function in real-world scenarios. Below are answers to the most common queries students and families search for when finalizing their funding plans.

While difficult for undergraduates, it is not impossible. Most students aged 18–21 lack the credit history and income required to qualify alone. However, some lenders offer “outcomes-based” loans specifically for juniors and seniors with high GPAs in specific majors (like engineering or nursing). Be aware that loans without a cosigner typically carry higher interest rates to account for the increased risk to the lender.

Yes, in two specific ways. First, submitting a formal application triggers a “hard inquiry” on your credit report, which may temporarily lower your score by a few points. Second, your repayment history is reported to credit bureaus. Making on-time payments is an excellent way for students to build a strong credit profile, while missed payments can severely damage your score for up to seven years.

You cannot borrow an unlimited amount. Private lenders generally cap your loan at the school’s certified Cost of Attendance (COA) minus any other financial aid you receive. This aggregate limit includes tuition, fees, room, board, and books. The school’s financial aid office must certify the loan amount to ensure you do not borrow more than necessary.

Private loans are generally considered “worth it” when they bridge the gap to complete a degree that significantly increases your lifetime earning potential. If the alternative is dropping out due to lack of funds, a private loan can be a strategic investment in your future. The key is ensuring your total student debt at graduation does not exceed your expected first-year annual salary.

Generally, no. Private student loans do not qualify for federal forgiveness programs like Public Service Loan Forgiveness (PSLF) or Teacher Loan Forgiveness. However, most reputable lenders will discharge the debt in the unfortunate event of the primary borrower’s death or total and permanent disability. Always verify these specific discharge policies in the loan contract.

Don’t just look at the interest rate; focus on the Annual Percentage Rate (APR), which accounts for the interest rate plus any fees, giving you the true cost of the loan. Additionally, compare “soft” benefits like cosigner release terms, forbearance limits, and whether the lender offers an autopay discount (typically 0.25%).

By separating fact from fiction, you can see private student loans for what they really are: a tool to help you achieve your educational goals when other funding falls short. They are not inherently dangerous, nor are they a trap for the unsuspecting. They are simply financial products that require careful consideration and responsible management.

As Sandy Baum, higher education economist, notes, “Borrowing is not inherently bad; the question is how much, and under what terms.” With the myths cleared away, you can focus on finding the terms that best fit your budget and future goals. Keep these core truths in mind as you finalize your funding strategy:

• Federal first, always: Maximize federal loans before turning to private lenders to ensure you keep vital protections.
• Credit matters: Your credit score (or your cosigner’s) directly impacts your cost; shopping around is the only way to find the best deal.
• Read the fine print: Look beyond the monthly payment to understand the APR, repayment terms, and flexibility options.
• Borrow only what is needed: Just because you are approved for the full cost of attendance doesn’t mean you should take it.

You now have the knowledge to navigate the lending landscape with confidence. If you have identified a funding gap for the upcoming semester, take the next step by comparing real offers to see what rates are available to you.

Compare rates from 8+ trusted lenders

References and resources

For unbiased information and tools to help you navigate your borrowing options, consult these official government and non-profit resources. These sites provide the foundational data used to compare federal and private lending environments.

• Federal Student Aid (StudentAid.gov): The definitive source for federal loan terms, current interest rates, and managing federal debt.
• Consumer Financial Protection Bureau (CFPB): Features a “Paying for College” tool to compare financial aid offers and guides on student banking rights.
• FinAid.org: A trusted, comprehensive resource offering calculators and objective guidance on scholarships, loans, and savings.
• U.S. Department of Education: Provides broad policy information and resources for identifying predatory lending practices.