Private Loans

In theory, private student loans are used to fill the gap between available federal aid, and what students and families can afford to pay out-of-pocket for college costs. In practice, unfortunately, many borrowers take out these higher cost loans without first exhausting their federal student assistance options.  Private student loans lack the more affordable, fixed rates, and flexible repayment options that federal loans have. Prospective borrowers should exhaust federal grant and loan options before considering a private student loan.

Banks and other financial institutions make private student loans without any financial backing from the federal government.  Some schools also have their own private loan products.  Private loans are also called private-label or alternative loans. Because the government does not subsidize private student loans, the rates and terms are not regulated the way they are for federal loans, which makes private loans more risky and expensive.

Private student lending peaked before the credit crash in 2007-2008 and is starting to grow again. Sallie Mae is the biggest private student lender.  The Institute for College Access Success issued this May 2014 fact sheet on private loans.

Loan Rates, Fees, and Limits

Private loan terms and conditions, including interest rates and fees, are generally based on your credit history or a co-signer’s credit history. This means that low-income students or those with negative credit histories will likely receive more expensive loans. Like government loans, private loans are supposed to be used only to finance postsecondary education (including books, transportation, and room and board). Check your school’s estimated cost of attendance and consult with the financial aid office before deciding on a private loan amount.

Private lenders may pressure or even require you to get a co-signer. A co-signer is a relative, friend or someone else who agrees to be responsible for your debt. Co-signers must understand that they are responsible for paying back the debt just as if they had received the money.  The CFPB has sample letters to help you request that the lender release a co-signer from an account.  Many lenders advertise that a co-signer may be released after a certain number of payments or other requirements, but do not let you know when you are eligible.

There are very important differences between government loans and private loans. If you take out a private loan, you will not be eligible for the same types of discharge, deferment and forbearance options that are available for federal loans.  However, some private lenders may choose to offer cancellations or other relief in certain circumstances.  You should check with your lender and ask about these options.   Some private student lenders also offer deferments and forbearances. but these vary by program.  Read your loan contract very carefully to learn about your private loan’s particular terms, conditions, benefits, rates, fees, and penalties. Private lenders do have to honor any promises they make about terms and benefits.

Most private student loans will have a disclosure statement similar to the information that is included on mortgage loans and car loans. This is because most private loans are covered by the Truth in Lending Act while federal loans are not.  Sample disclosures from the Federal Reserve Board:

Private education lenders are also required to obtain a completed and signed Self-Certification form before making a loan.

ALERT:  The Dodd-Frank financial reform legislation, signed into law in July 2010, created a Consumer Financial Protection Bureau (CFPB ).  The CFPB officially opened on July 21, 2011.  The agency has authority over most private student lenders.    The CFPB has a complaint system for borrowers experiencing problems with private student loans.

Check out NCLC reports on private loan issues as well as comments and testimony .