The cost of college is more than just tuition; it’s also room and board, books, supplies, living expenses, and fees. When your existing financial aid offer doesn’t cover everything, a private student loan can fill the gap. But before you borrow, it’s worth considering other sources of aid first.
Understanding the financial aid landscape is particularly important this year. Changes from the One Big Beautiful Bill Act (OBBBA), effective July 1, 2026, cap Parent PLUS and graduate loan limits, which could leave some families with a larger gap to fill. The phaseout of the federal Grad PLUS loan, which pays up to the full cost of graduate-level programs, also begins July 1.
This guide from Abe® walks through the options to consider before you borrow privately, from federal loans and grants to savings plans and employer benefits.
What is a private student loan?
A private student loan is a credit-based education loan issued by a bank, credit union, or online lender, not backed by the U.S. government, that typically requires a credit check or cosigner and lacks federal borrower protections like income-driven repayment or loan forgiveness.
Private student loans can be a helpful tool, but they work best after you’ve exhausted federal aid, grants, scholarships, savings, and school or state-based programs. For perspective, about 14% of all student loans in 2024–25 were nonfederal, a category that includes private, state, and institutional loans [1].
Before taking out a private student loan, maximize federal student aid by filing the FAFSA.
Most students who need financial assistance should apply for federal student loans before researching other sources of debt. These loans generally offer stronger borrower protections and broader eligibility than private student loan products.
The first step is to file the FAFSA, the Free Application for Federal Student Aid. That single application can unlock several types of federal support, including:
Direct Subsidized Loans
Need-based loans for eligible undergraduate students: The government covers the interest while you are enrolled at least half-time, during your grace period, and during approved deferment periods.
Direct Unsubsidized Loans
Available to eligible undergraduate and graduate students and not based on financial need: Interest starts adding up from the day the loan is disbursed, including while you are in school.
Pell Grants
A Pell Grant is a need-based federal grant from the U.S. Department of Education that helps undergraduate students pay for college and does not have to be repaid. Eligibility and the award amount are determined by the FAFSA, based primarily on the Student Aid Index, cost of attendance, and enrollment status.
Work-Study
Federal Work-Study is a need-based program that funds part-time jobs for undergraduate and graduate students. Eligibility is determined through the FAFSA.
Pro Tip: FAFSA processing delays have pushed out aid offers in recent years, leaving some students less time to compare options before May 1 decision deadlines [2]. File as early as you can, and keep a backup plan in case your award arrives late.
Explore grants and scholarship opportunities.
Grants and scholarships are money you don’t have to pay back, which makes them the most cost-effective way to reduce how much you borrow, especially through private student loans. A little extra effort here can lower your loan balance for years to come.
Grants
A grant is need-based financial aid, usually from the federal government, a state, or your school, that does not have to be repaid.
The opportunity is real. Among private loan borrowers, 36% received Pell Grants and 51% received need-based grant aid from some source [3]. That overlap suggests many students who turned to private loans might have borrowed less by researching more grant opportunities first.
Scholarships
A scholarship is merit or criteria-based funding awarded by schools, organizations, or private entities that does not have to be repaid.
Where to Find Grants and Scholarships
You can find grant and scholarship money in more places than most families realize. Start here:
- Federal Pell Grants, awarded through the FAFSA.
- State-specific grant programs, often run through your state’s higher education agency.
- Institutional grants and merit scholarships offered directly by the colleges themselves.
- Private and nonprofit scholarships, community foundations, and professional associations.
Employer scholarships deserve a closer look too. Some companies fund awards for employees or their family members, and these often draw smaller applicant pools. For a deeper list of places to search, see Abe’s roundup of where to find college scholarships.
Pro tip: if your financial circumstances have changed since you filed the FAFSA, ask your school to reconsider your aid package. Many schools will reassess an award when a family’s situation shifts.
Use 529 plans and education savings strategies.
Saving changes the math; yet, the tool built for it sits largely unused. Close to 70% of college savers are not using a 529 plan, and roughly $1.3 trillion in education savings sits in cash, retirement, and other non-529 accounts [2].
What is a 529 Plan?
A 529 plan is a tax-advantaged savings account built specifically for education expenses. Your contributions grow tax-free, and withdrawals for qualified education costs are not taxed at the federal level.
How you own those savings matters for financial aid. The federal aid formula counts up to 5.64% of parent-owned assets, compared with about 20% for student-owned assets [2]. When it’s practical, steering college savings into a parent-owned 529 can improve your eligibility for more need-based federal aid.
Here is how common account types compare:
| Account type | Impact on federal aid |
|---|---|
| Parent-owned 529 | Lower impact; up to 5.64% of assets assessed |
| Student-owned 529 | Lower impact; treated as a parent asset, so up to 5.64% of assets assessed |
| UTMA or UGMA custodial account | Higher impact; up to 20% of assets assessed |
| Taxable brokerage account | Fully countable as assets, with no education tax advantages |
Trump Accounts: A New Education Savings Option
The One Big Beautiful Bill Act also created Trump Accounts, a new tax-deferred investment account for children under 18. Children who are U.S. citizens and born between January 1, 2025, and December 31, 2028, qualify for a one-time $1,000 federal seed deposit, and parents, relatives, and employers can add up to $5,000 a year once contributions open in July 2026 [7].
The money is invested in low-cost stock index funds, and after the child turns 18, it can go toward education, a first home, or starting a business without the standard early-withdrawal penalty [7]. There is a tradeoff worth understanding: a Trump Account is not a dedicated education account. Its education withdrawals are not federally tax-free the way a 529’s are, and how it affects financial aid is still being clarified. For families saving specifically for college, a Trump Account tends to work best alongside a 529 rather than in place of one [7].
Pro Tip: Starting late still helps. Every dollar you save is a dollar you do not borrow with interest attached.
Investigate school and state-based aid programs.
Beyond federal aid and outside scholarships, your school and your state may offer other sources of assistance that cost less than a private loan. These programs are easy to miss because they are not always advertised.
It’s worth researching options like these [4]:
- Institutional emergency loans or grants, which are short-term and often interest-free.
- Tuition installment or payment plans that spread your bill across the semester without interest.
- State-specific loan programs, which often carry fixed rates and borrower protections.
- College completion grants for students close to graduation who hit a funding shortfall.
Reach out to your school’s financial aid office early in the process and ask which institutional and state options you qualify for before you look at private loans.
Consider Income Share Agreements and Employer Tuition Assistance
Two more alternatives tend to fly under the radar. One ties repayment to your future earnings, and the other can cover costs you would otherwise borrow.
Income Share Agreement (ISA)
An income share agreement (ISA) is a financing arrangement in which a student receives a loan for education and pays back an agreed-upon percentage of their post-graduation income for a set period after they begin working.
ISAs come with tradeoffs. Supporters point to potential gains in completion and recruitment, while critics warn that some agreements are lightly regulated and can produce discriminatory outcomes [5]. If you consider one, read the terms closely, including the income threshold, the percentage you owe, any payment cap, and the length of the contract.
Employer Tuition Assistance
Many employers offer tuition reimbursement, and under current IRS rules they can provide up to $5,250 per year tax-free. These benefits are often undervalued and can reduce or even remove the need for a private student loan. Before you borrow, check with your HR department to see what your employer, or a parent’s employer, offers.
Military Education Benefits
Military families have additional options worth exploring, including the GI Bill and Tuition Assistance, which can fund education without borrowing.
If you need a private student loan to close the gap…
Plan Borrowing and Repayment Carefully
Sometimes a private student loan is the right call after every other source comes up short. Start from one principle: do not borrow money you don’t actually need, and use a loan repayment estimator to see the long-term cost before you commit [4]. From there, a simple flow keeps you on track:
- Add up your total cost of attendance, then subtract all grants, scholarships, savings, and federal loans.
- Identify the exact gap that remains. That figure is the most you should borrow.
- Run the numbers through a loan repayment calculator to project monthly payments across different rates and terms.
- Compare at least three to five loans on rates, fees, and repayment flexibility.
- Choose the smallest amount and the shortest term you can comfortably handle.
It also helps to understand disbursement timing. Loans for a full academic year are usually split into equal disbursements by term. For example, a $10,000 loan covering fall and spring is typically released as two $5,000 disbursements, one applied to each term [4].
Borrow conservatively. Student loan delinquency rates run high compared with other types of consumer debt, which is a good reason to keep your balance as low as you reasonably can [6].
Seek Professional Financial Aid Counseling and Resources
Good guidance can change the quality of a borrowing decision, and plenty of students don’t realize help is available. In-person financial aid counseling tends to be more effective, though many aid offices lack the resources to offer it widely [6]. That makes it worth asking your school directly for a one-on-one meeting.
Keep in mind that schools cannot require steps beyond the federally mandated entrance counseling before you access federal student loans [6], so the initiative to seek extra guidance usually has to come from you. A few resources to lean on:
- Your school’s financial aid office. Ask about the Self-Certification form you will need for a private student loan.
- StudentAid.gov for federal loan tools and FAFSA filing.
- Nonprofit credit counseling organizations, such as agencies that belong to the National Foundation for Credit Counseling (NFCC).
- Abe’s blog for ongoing student loan and college financing guidance.
An informed decision now can save you thousands of dollars and years of repayment stress later.
Abe private student loans can help cover what’s left.
If you’ve worked through these alternatives and still have a gap between your costs and your resources, a private student loan can bridge the difference. When you reach that point, compare Abe’s competitive rates and borrower benefits and find your rate in minutes with no impact on your credit score.2
Frequently Asked Questions
What is the first step before considering a private student loan?
Start by filing the FAFSA, the Free Application for Federal Student Aid. It unlocks federal subsidized and unsubsidized loans, grants, and work-study, which generally offer lower rates and stronger borrower protections than private student loans.
How do grants and scholarships reduce the need to borrow?
Grants and scholarships are money you do not repay, so every dollar you win directly lowers the amount you need to finance. Prioritizing these awards, from federal Pell Grants to institutional and private scholarships, can shrink or even close the gap that might otherwise require a private student loan.
Can students get federal loans without parental involvement?
Yes. Independent students can access federal Direct Loans by filing the FAFSA on their own. Dependent students facing special circumstances, such as estrangement from their parents, can request a dependency override through their school’s financial aid office to be considered independent.
What payment plans or emergency aid are available from schools?
Many colleges offer interest-free tuition installment plans that break semester costs into monthly payments, along with emergency grants or short-term institutional loans for students hit by unexpected shortfalls. Contact your financial aid office early to learn what your school provides.
When is a private student loan appropriate despite other options?
A private student loan makes sense once you have maximized federal aid, grants, scholarships, savings, and institutional programs and still have a verified gap between your cost of attendance and your available resources. At that point, compare several loans on rates, terms, and borrower protections before you commit.
External References
[1] financialplanningassociation.org. Rethinking education funding.
[2] am.jpmorgan.com. FAFSA Fiasco: Navigating the chaos, challenges, and changing rules.
[3] ticas.org. Private Student Loans Facts and Trends.
[4] buffalo.edu. Types of private loans.
[5] aplu.org. Addressing student need beyond crisis management.
[6] federalreserve.gov. Student loan counseling challenges and opportunities.