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Private Student Loans

Private loans, also known as alternative loans, are used to supplement to federal financial aid. Students need to have used up their Pell Grant money and borrowed the maximum federal Perkins and Stafford Loans to borrow from a private lender. Students who are not awarded federal student financial aid can also take out private student loans.

Interest Rates

Private loan rates fluctuate with the economy and vary from lender to lender. Unlike federal loans, each private lender sets their own interest rates and chooses their own benefits. Private loans usually have higher interest rates than federal loans, but lenders have the freedom to lower their rates or increase borrower benefits.

Borrowing Limits

Private lenders have higher borrowing limits than federal loans. The lender has the freedom to 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. Borrowing limits for federal loans are outlined in the FAFSA award letter. The maximum Stafford Loan amount for full-time dependent undergraduates in 2014-2015 was between $5,500 and $7,500 annually, depending on the year in school. If a parent is eligible to receive a federal PLUS Loan, they can borrow more federally.

Choosing a Student Lender

Students who attend schools participating in the William D. Ford Federal Direct Loan (Direct Loan) Program borrow directly from the government and do not need to select a student lender for their federal loans. Due to recent expansion of the program, almost all schools participate in the program Direct Loan program. Schools have a preferred lender list that recommend private lenders to students, but it is best to do your own research 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.

Private vs. Federal 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.
  • Federal Stafford payments are deferred six months after graduation. Interest does not accumulate during this time.
  • Parents who take out PLUS Loans must make the first payment within 60 days after the loan is fully disbursed. Graduate students who take out PLUS Loans may defer their loans until graduation, but interest will accrue during this period.
  • Both federal and private loans have to be repaid regardless of the borrowers financial situation. This includes bankruptcy. Federal loans can be discharged under certain rare circumstances.
  • There are federal loan forgiveness programs for students who go into certain professions after graduation and meet other program requirements.

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Last Reviewed: November 2018