Paying for schooling can seem overwhelming, especially if federal and state aid only cover part of your education. But when all other options are exhausted, there is one last line of defense: private college loans. However, before applying for one, students need to make sure they’re being smart about their private loans.

How do private student loans work?

A private loan is a loan that you can take out with a private institution such as a bank or credit union, which earns money from the interest that you pay. Interest rates for education loans are often lower than other lines of credit, but they can still add up so students should always look for the lowest and most stable rate.

Should I take out a private college student loan?

Here are some tips to keep in mind when considering a private student loan:

• Check for free money first. Find out if you are eligible for federal and state aid such as scholarships and grants by filling out the Free Application for Federal Student Aid (FAFSA). The FAFSA process can also let you know if you're eligible for federally subsidized loans, which have lower interest rates (read more about how to get financial aid FAFSA).
• Talk to your school. Colleges and universities often offer recommendations on where to apply for more funds. Plus, they might know of other ways to get grants, fellowships, or scholarships that might lower your private loan amount.
• Check your credit score. Private loans differ from federal loans in that banks and other private lenders could reject you or set a higher interest rate based on bad credit or a lack of credit history. Federal loans are granted often regardless of credit score or other financial issues but have limits.
• Talk to family and friends about co-signing. If you have no credit history, it's a good idea to begin conversations with trusted, credit-worthy individuals about the possibility of having them cosign your private loan.

For more information:
Loans 101: What are Student Loans?
Loans 101: How to Avoid Defaulting on Student Loans
Funding Education Beyond High School: The Guide to Federal Student Aid 2009-10