College  |  December 27, 2018  |  Lisa Litant

How a private student loan works

What you'll learn
  • How to find and apply for a private student loan
  • How your loan is approved
  • How the funds get to your school

OK. You’ve added up your college scholarships, federal student loans, and your savings—and you still need money to pay for your upcoming semester. Your next step may be to get a private student loan.

Here’s an overview of how student loans work, from when you decide to apply, to when the money actually gets to your school.

Two decisions before you apply for a loan

1. How do you choose a student loan?

Private student loans are offered by banks, credit unions, and other financial companies. There are a lot of loans out there, but don’t get overwhelmed.

  • Your college’s financial aid office may be able to give you a list of lenders.
  • You can check with your local bank/credit union.
  • You can ask friends and family about who they’ve used for private student loans.

Need money for college?

Consider a Sallie Mae® private student loan

  • Available for online or on-campus study
  • Competitive fixed and variable rates
  • No origination fee or prepayment penalty
  • Multi-Year Advantage: Returning undergraduate students have a 95% approval rate with a cosigner1
blog cross sell ad photo of a young female girl student sitting at her desk studying with notebooks, headphones, and laptop.

Once you have some options, go online and compare what they have to offer. A spreadsheet can help you keep track of different loan features. Here are some things to note:

  • Is there a choice of repayment options (i.e., making payments while you’re in school vs waiting until you leave school)?
  • What are the interest rates offered with the loan?
  • Are there benefits that can lower your loan’s cost?
  • Is there a loan for your specific needs (undergraduate or graduate student)?
  • Are there any extra expenses, like fees?
2. Do you need a cosigner?

Private student loans are credit-based, which means the lender will check your credit rating and other info. If you’re just entering college, you may not have much credit history, so you may need a creditworthy cosigner.

  • A cosigner shares responsibility with you for paying back the loan.
  • They can be a creditworthy parent, relative, guardian, or any adult who has good credit.
  • If you’re a grad student or you’ve been working for a few years and paying your bills on time, your credit may be strong enough that you don’t need a cosigner.

Pro tip:

Taking out a student loan, even with a cosigner, and making on-time payments can help you build your own credit history.

Now you’re ready to apply

1. Applying

To make the application process as smooth—and stress-free—as possible, make sure you’ve got this info before you start:

  • Personal info—like your date of birth, address, and Social Security number
  • School info—where and when you’re attending school, and the degree you’re considering
  • Financial information, like your bank account
  • Employment information and income (if you’re working)
  • How much money you want to borrow

If you have a cosigner, they’ll have to fill out information, too—either at the same time as you or later—before the lender can decide whether you’re approved for the loan.

Pro tip:

Wondering how much money you should take out? Here’s some help.

2. Getting credit-approved

Once you’ve submitted your application, it can take as little as 15 minutes to find out if you’re credit-approved. If the lender needs more information, the approval can take a few business days.

  • Your lender wants to see if you and your cosigner (if you have one) are good credit risks (i.e., the likelihood that you’ll repay the loan).
  • Every lender has specific criteria that they look for—this can include a particular credit score range, outstanding debts, income, and more.
  • When you (and your cosigner, if you have one) pass the credit review, you’ll be notified that you’re approved.
3. Choosing your loan options

Now that you’re credit-approved, you may need to specify the loan options you want. It’ll be easier (and faster) if you read up on your choices beforehand; they should be described on the lender’s website.

You may be asked to choose your student loan repayment option and interest rate type. These choices help determine when—and how much—you pay back until the loan’s repaid in full.

The lender may ask you and your cosigner (if you have one) to accept the loan terms in the Loan Approval Disclosure by phone or online. Make sure you’re ok with what you’re accepting—if you have questions, ask the lender or someone you trust who has more financial knowledge.

4. School-certifying your loan

Your loan may need to be “school-certified.” That means your college confirms that you’re enrolled and that you’re not asking for more than the cost of attendance (like money you want for a vacation). This will typically happen automatically between your school and the lender…there’s nothing for you to do.

  • How quickly the money is sent (disbursed to the school) depends on several factors, including when the school is notified by the lender and after that, how long it takes your school to process the certification.
  • After your loan is certified, the lender will give you a Final Disclosure. This lists your loan’s interest rate, number of payments, fees, and other important info. Hang on to it. You may need the info later.
5. Disbursing (sending) your loan to your school

After your school certifies your loan, and after the right-to-cancel period of the Final Disclosure expires, your lender and your school may work together to set the dates that funds will be disbursed (sent) to your school.

Interest begins to accrue (grow) on a loan as soon as the funds are disbursed. So, if your loan covers several semesters, your lender may disburse only the money needed for that semester, in order to reduce interest costs.

  • After the school receives the funds, they’ll take what they need for tuition and room/board.
  • The remaining funds may be sent to you or handled some other way by the school—check with your school about its policy.

Pro tip:

If you get a refund, remember it’s still borrowed money—and you’re paying interest on it! If you don’t need it for college expenses, return the remainder to your lender to help lower your total loan cost.


If you have questions about applying for a loan or any of the terms in your loan, ask your college’s financial aid office or call your loan provider for help.

1. You must apply for a new loan each school year. This approval percentage is based on students with a Sallie Mae undergraduate loan in the 2018/19 school year who were approved when they returned in 2019/20. It does not include the denied applications of students who were ultimately approved in 2019/20.

Sallie Mae does not provide, and these materials are not meant to convey, financial, tax, or legal advice. Sallie Mae makes no claims about the accuracy or adequacy of this information. These materials may not reflect Sallie Mae’s view or endorsement. Consult your own attorney or tax advisor about your specific circumstances. Reproduction without explicit permission is prohibited.