Private student loans are provided through private lenders, such as online lenders, banks or credit unions who determine their own student loan interest rates, eligibility requirements, and terms and conditions. While federal student loans typically involve no underwriting and take a “one-size-fits-all” approach to interest rates, private student lenders can offer lower rates to borrowers with good credit.
Federal student loans issued by the U.S. Department of Education have fixed interest rates that are “one-size-fits-all.” Your credit score or credit history is not taken into account when determining your eligibility for most federal loans (PLUS loans require a credit check). Loans to undergraduates carry the lowest rates, while loans to graduate students and parents carry higher rates. But everyone receiving the same type of federal loan in the same academic year has the same interest rate for the life of their loan.
Some federal loans are subsidized, meaning the federal government pays the interest while a student is still enrolled in school, in deferment, or under a “grace period.” This is not the case for unsubsidized federal loans or private student loans, where interest accrues while students are still enrolled in school.
Federal student loans also come with important borrower benefits, including options for deferment and forbearance, access to income-driven repayment plans, and the potential to qualify for loan forgiveness. Federal loan benefits are aimed at helping borrowers who are having trouble repaying their loans, in many cases allowing them to temporarily suspend or lower their monthly payments.
College financial aid offices use the information you submit on your Free Application for Federal Student Aid (FAFSA) to determine how much financial aid you are eligible to receive. The calculation is based on the school’s cost of attendance and your expected family contribution. If you need more funds to cover your expenses, you may need to look toward scholarship opportunities, grants, or private loans.
Who funds private student loans?
Private student loans are funded by banks, credit unions, and investors who provide funding to online lenders. A number of state student loan authorities also have the ability to issue tax-exempt bonds that allow them to offer student loans and student loan refinancing on terms that are similar to private loans.
Although private student lenders are strictly regulated, they have a good deal of flexibility to determine the rates and terms of the loans they offer. Most private lenders offer borrowers a choice of variable or fixed interest rates, and the option to defer payments while they’re still enrolled in school.
When applying for a private loan, borrowers (or their co-signers) must demonstrate their ability to repay the amount they wish to borrow. Most lenders will only provide funds up to the school’s certified cost of attendance, minus other loans and financial aid already received. Applications for private student loans often require documentation that federal loans do not. For example, private loans almost always require a credit check.
How you can use the funds?
You can use private student loans to pay for living expenses and qualifying education-related costs, which may not be covered by your federal student loans. These include college tuition and fees, and other expenses such as food, transportation, and housing. Other qualifying educational expenses may include books, school supplies, computers, electronics, and other personal needs related to your education. If you have other expenses that you cannot afford, you can consider a personal loan for students.
Interest rates and terms on private loans can vary, depending on your needs, financial situation, and credit history. In many cases, private student lenders will require a co-signer, such as a parent or relative, who has a strong credit history and good credit score. Although private students loans can help cover your unmet needs, you still need to know how to take out a student loan.