What is a Private Student Loan?

on May 22, 2017

Private student loans are nonfederal student loans used to pay for college costs.


Banks, credit unions and other financial institutions, as well as state agencies, colleges and universities make private student loans. Private student loans are supplemental loans that are used to fill the gap between a college’s cost of attendance, the family’s financial resources and student financial aid.


The lender, not the federal government, sets the terms and conditions of a private student loan. In particular, each lender sets the interest rates, fees, loan limits and repayment terms on their loans.


Most private student loans are credit based. Private student loan eligibility depends on the borrower’s credit history, credit scores, debt-to-income ratios and annual income. If the borrower isn’t creditworthy, a creditworthy cosigner might be required.


Interest rates can be fixed or variable. Generally, interest rates are based on credit scores, with credit scores grouped into five or six tiers. Borrowers with better credit scores get lower interest rates. The federal government does not subsidize interest. Forbearances are limited to a year in total duration, shorter than the three years available for federal student loans.


About half of private student loan programs offer death and disability discharges similar to the ones offered by the federal government. Most private student loans do not offer income-based repayment plans. Some private student loans offer graduated repayment plans, where a few years of low payments are followed by regularly amortized payments. Private student loans are not eligible for public service loan forgiveness.


The application process for private student loans is simpler than the application process for federal student loans, since private student loans do not require students to file the Free Application for Federal Student Aid (FAFSA). Private student loans are required to provide prospective borrowers with a series of informative disclosures. Federal student loans are not subject to these disclosure requirements.


Like federal student loans, private student loans do not have a prepayment penalty and are eligible for the student loan interest deduction. Both federal and private student loans are exempt from bankruptcy discharge except if the borrower can demonstrate undue hardship in an adversarial proceeding.


Private parent loans are like private student loans, but the parent is the only borrower.

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