Bank Student Loans: Compare Rates, Pros and Cons

If you need to borrow money for college, you're not alone. About 40% of first-year students take out student loans, according to the National Center for Education Statistics. Many of these students rely on a combination of federal and private student loans, including loans from banks.

Before you take out a bank student loan, it's important to understand how they work and compare your options. Here's what you need to know, along with a few lenders worth considering.

What are bank student loans?

Bank student loans are a type of private student loan offered by privately owned financial institutions. Unlike federal student loans with standard terms and a single application process, bank student loan terms vary depending on the lender. Each bank sets its own eligibility requirements, interest rates, and repayment options, so you'll need to apply directly with the bank to get a loan.

Banks that offer student loans

Most major banks, including Wells Fargo, JP Morgan Chase, Bank of America, Citibank, Capital One, Discover, and American Express, do not offer private student loans. However, you can find student loans from the following banks:

Who qualifies for a bank student loan?

To get a bank student loan, you'll need to meet certain requirements the lender sets. These typically include a good credit score, steady income, and enrollment at an eligible school.

In most cases, you'll need a minimum FICO score of 670. “This is why the majority of student borrowers who take out a private student loan need a cosigner,” says Bethany Hubert, a financial aid specialist at Going Merry by Earnest.

When you apply with a cosigner, the lender considers their credit and income as part of your application. If your cosigner has stronger credit, you'll have a better chance of getting approved and may even qualify for a lower interest rate.

Pros and cons of bank student loans

Bank student loans have the potential to offer lower rates than other options — particularly if you have excellent credit. Some lenders also provide rate discounts for setting up automatic payments, which can help lower your overall costs.

Another benefit is flexibility. Many lenders allow you to choose from multiple repayment options, like interest-only payments while in school or full deferral until after graduation. Some banks also offer a grace period before you start repayment.

Bank student loans can also help you borrow more than federal student loans, which have lower annual and lifetime limits. This is especially helpful for graduate or professional degrees.

“Many borrowers choose private student loans because they need a higher loan amount, especially for an advanced degree that doesn't get fully covered by other financial aid sources,” says Hubert.

However, there are downsides. Student loans from banks don't have the same payment relief options as federal loans. You also won't have access to federal benefits like Public Service Loan Forgiveness or income-driven repayment (IDR) plans.

“Private loans do not typically offer the possibility of forgiveness or cancellation apart from very specific scenarios, such as death or permanent disability,” says Sara Parrish, president of CampusDoor, a loan origination platform.

How to apply for a student loan from a bank

To apply for a bank student loan, you'll need to submit an application directly through the bank's website. Before you start, compare a few lenders to find the best rates, fees, and loan terms.

It's also important to “confirm if the lender's loan limits can cover your education expenses,” says Hubert. She also recommends you “review customer feedback to ensure the lender has a reputation for supporting their customers.”

Once you're ready to apply, gather the necessary documents ahead of time.

“Students should gather identity documentation — a driver's license and Social Security card, income documentation for themselves, if applicable — a W-2 and two pay stubs, and let their cosigner know to do the same,” says Parrish.

If you're applying with a cosigner, they don't need to be physically present.

“It's OK if the cosigner is not physically sitting with the student. Private lenders make it simple to invite cosigners to complete their part of the application,” Parrish explains.

She adds that after you submit your application, the bank may request copies of your documentation, so be ready to upload those when needed.

Bank loans vs. federal student loans: Which is better?

Federal student loans offer more protections, including income-driven repayment, deferment, and loan forgiveness. That's why most students should use federal loans before considering private loans.

“Private loans offer more options up front while federal loans offer more protection on the back end,” says Jack Wang, a wealth adviser at Innovative Advisory Group who specializes in helping families pay for college.

However, if you or your cosigner have strong credit, a bank student loan could provide lower interest rates.

“Students, and potentially with a cosigner, would look at a bank or private lender for a student loan if they have a really good credit profile and do not need the provisions offered by federal student loans,” advises Wang.

“It's worthwhile to do a comparison between the rates, fees, and repayment terms of both programs,” adds Stacey MacPhetres, senior director of education finance for EdAssist by Bright Horizons.

“When considering if a student should borrow their federal student loans first, they should compare their overall costs over the life of the loan to the private loans they are considering,” says MacPhetres.