As federal aid for college shrinks, heres what to look for in a private student loan

Starting July 1, changes introduced in the One Big Beautiful Bill Act last year will add new caps on federal student loans, as well as restrictions on loan forgiveness and repayment programs.

The result, student loan experts say, will be a greater reliance on private loans to cover financial gaps.

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.

“For [dependent] undergraduate students, federal loan limits are very low — a freshman can only borrow $5,500 on their own,” he said. “Typically, parents would step in with Parent Plus loans, which were previously uncapped.”

But now, Parent Plus loans for new borrowers are limited to $20,000 per student per year and $65,000 in total.

“Do the math — $20,000 a year times four is not $65,000,” Farrington said. “A parent might start out freshman year borrowing $20,000 for their child, and then do the same thing sophomore and junior year. By the time they get to their senior year, they’ve got just $5,000 left in available federal aid. That’s a huge change that might push more families into the private market.”

“A lot of people are going to have to turn more to private loans — especially beyond undergrad,” said Betsy Mayotte, founder of The Institute of Student Loan Advisors (TISLA). “There’ll be more private borrowing with undergraduates because of the limits on Parent PLUS loans. But definitely for graduate and professional degrees.”

In general, borrowers most likely to take out more private student loans include:

• 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

According to Farrington, parents who could qualify for a lower rate will also be revisiting private loans.

“Going forward, Parent Plus loans won’t be eligible for income-driven repayment plans or Public Service Loan Forgiveness — only the standard repayment plan,” he said. “Combine that with the 9.07% interest rate this year, and private loans look more appealing to parents with good credit.”

Federal student loan interest rates for 2026-2027

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.

“Really understand what repayment looks like from each lender,” Farrington said. “Even if you can pay $25 a month while you’re in college, it can make a big difference over the course of the loan.”

Be sure to find out whether you can switch repayment plans if your financial situation changes.

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.

Customization: Private loans often offer both fixed or variable rates and a variety of repayment terms. College Ave, for example, has 5-, 8-, 10-, and 15-year terms (20 years for graduate loans) and lets you start repaying in school or defer until after your grace period ends.

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.