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Private Student Loans

Private loans, also known as alternative loans, are used to supplement or in place of federal financial aid. Students are encouraged to use their Pell Grant money and borrow the maximum amount in federal loans before borrowing from a private lender. Students who are not awarded federal student financial aid can also take out private student loans, and private loans can cover costs that federal loans cannot, including less than part-time enrollment, room and board, and relocation fees.

Before considering private loans, students should exhaust all other financial aid options, including scholarships, grants, and student employment.

Eligibility Requirements

Private lenders set the eligibility requirements for their loans, but generally students are eligible if they:

  • Are enrolled in an eligible college or university.
  • Meet age, citizenship and education requirements.
  • Plan to use loan for educational expenses only.
  • Meet credit score, income or debt requirements.

Students without strong credit scores will need a cosigner, typically their parents, to help secure the loan. It’s important to note that cosigners will also be responsible for repaying the loan, and the loan will show up on their credit reports, not the student’s.

Interest Rates

Private loans generally have two kinds of interest rates:

  • Variable-rated: the interest rate fluctuates with the economy.
  • Fixed-rated: the interest rate is locked in over the life of the loan, similar to federal loans.

Unlike federal loans, each private lender sets their own interest rates and chooses their own borrower benefits. Private loans usually have higher interest rates than federal loans, but lenders have the freedom to lower their rates or increase borrower benefits. For those who have good credit, interest rates may even be competitive with federal loans.

Private loans can be consolidated, but the interest rate of a consolidated loan will reflect the borrower’s current credit score.

Borrowing Limits

  • Private lenders have higher borrowing limits than federal loans.
  • Private lenders designate how much a student can borrow.
  • For most private loans, the borrowing limit is equal to the cost of attendance minus other financial aid.

Students should also consider all other avenues of financial aid like scholarships, grants and student employment before taking out more loans.

Choosing a Student Lender

Schools have a preferred lender list that recommend private lenders to students, but it is best to do your own research. Schools are required to process loans from the student’s lender of choice, regardless of whether the lender is on the preferred lender list. Parents and students should do their research before applying.

Private Loan Repayment

Private lenders often require students start making payments immediately after the initial disbursement. If the loan is in forbearance, interest will still accumulate. Private lenders may offer affordable or flexible repayment plans, but doing so is not a requirement. Any offer of deferment, extended forbearance or other repayment plan from a private lender should be weighed carefully.

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Last Reviewed: September 2020