Private loans, sometimes called alternative or commercial loans, are student loans provided by financial institutions or other organizations—not the federal government. They are used to bridge the gap between your financial aid and your cost of attendance, or if you do not qualify for other forms of financial aid.
Some student loan servicers collect payments for both private loans and federal loans, so it can be very confusing to figure out what types of loans you have. Here are some tips to help. For starters, take a look at some of the main differences between federal and private loans.
|Federal Stafford Loans||Private Student Loans|
|Flexible Repayment Options||Yes||Sometimes|
|Ability to Postpone Payments||Yes||Sometimes|
|Fixed Interest Rate||Yes||Sometimes|
|Forgiveness/Cancellation Options||Yes, if you qualify||Rarely|
|6 Month Grace Period||Yes||Rarely|
Where Can I Get A Private Loan?
Private loans are generally offered by schools, states, or financial institutions, including:
- Banks/student loan lenders
- Credit unions
- Credit card companies
- Directly from the school (institutional loans)
While credit card companies sometimes offer student loans, these loans are not the same thing as a credit card.
How Do I Know If I Should Get A Private Loan?
You should always maximize the amount of federal student loans you borrow before taking out private loans. Private loans can be much tougher to manage and repay than federal student aid because they tend to offer fewer options for repayment and postponement (deferment/forbearance).
Getting Private Loans: A Tricky Process
Applying for a private loan is a lot like applying for other types of bank loans. The lender will have to check your (and your co-signer's) credit before approving you. Sometimes, you have to apply first and learn what repayment options and terms you qualified for afterward. These details can vary dramatically depending on who your lender is—but in general, the terms may be less flexible than federal loans, especially if you find yourself struggling to make your payments. Remember to do all of your homework before accepting any loans.
Misleading Interest Rates
Although many private lenders advertise low interest rates, these are typically difficult to qualify for without a co-signer and many students receive variable interest rates. So, your private loan's rate may start out higher than the advertised rate—and can then rise over time depending on changes to your credit score and to interest rates in general.
Here's a worst-case scenario of how your private loan interest rate could change (risk varies by lender):
Example is based on findings from a 2011 report by the Consumer Finance Protection Bureau.
Private lenders often require a co-signer to get a good interest rate, and some always require one. A co-signer agrees to repay the entire loan if you don't or can't pay as agreed.
Some lenders offer a co-signer release after you make 1 or 2 years of on-time payments. Generally speaking, though, there are few ways to remove your co-signer once they've signed the form, so this person may always share the responsibility of repaying the loan with you.
Can I Consolidate My Private Loans?
Some private lenders will allow you to consolidate the private loans they service with other private loans you have borrowed. Check with your servicer to find out. You can find these lenders online easily enough by searching terms such as “private student loan consolidation” or “private student loan refinancing.”
SALT does not endorse or comment on particular lenders. However, we do recommend that you review a lender on the Better Business Bureau and the Consumer Finance Protection Bureau (CFPB) before choosing them. The CFPB is the resident student lender watch dog and will have a lot of information on complaints made against student loan lenders. Reviewing these sites will help you choose a lender who has a good reputation with their borrowers.
Private Health Professions Loans
Some private lenders offer special student loans for students entering into healthcare fields. These may seem very similar to federal loans for health professionals, but keep in mind that these have the same drawbacks as any other private loan. Generally speaking, they offer fewer repayment and postponement options, and they rarely allow for student loan forgiveness.
How Do I Know If My Loan Is A Private Loan?
All of your federal Stafford, PLUS, and Perkins student loans are listed in the National Student Loan Data System (NSLDS); however, federal Title VII loans (including Health Professions Student Loans or Loans for Disadvantaged Students) are not. You can find these loans, as well as any private loans, on your credit report, which you can get for free once every 12 months at AnnualCreditReport.
Watch out: Some servicers manage both federal loans and private loans. If you can't tell whether your loan is federal or private, contact your servicer directly.
Can I Use Bankruptcy To Discharge My Private Student Loans?
Even though private student loans may seem like other types of loans you can get from a financial institution, they are still considered an educational debt and are very difficult to discharge in bankruptcy. A qualified bankruptcy attorney can help you determine if you might be eligible for this kind of debt relief.
Who Can Help Me If I Have A Dispute Concerning My Private Loan?
Many lenders now have ombudsman or enhanced customer care centers that handle escalated consumer issues. Making a phone call to one of those centers or sending a detailed, polite letter or email can be a good way to work out these kinds of disputes.
If you still aren't satisfied, the Consumer Finance Protection Bureau (CFPB) helps students resolve private education loan issues with their loan holders. You can file a dispute on the CFPB website. The CFPB ombudsman—a neutral mediator—can then help you and your lender find a resolution.