Private Loans for Education

What's the difference in a federal loan and a private loan?

• Federal student or parent loans are government-backed (or guaranteed) loans to help pay for college. They are low-cost, fixed-rate loans and have discharge and loan forgiveness options. Some of them are subsidized, which means the interest is paid for you while in college.
• Private loans (sometimes also called alternative loans) are consumer loans made to individuals to help pay for college. They are usually higher-cost, variable rate loans and are not backed by the federal government. They do not have a guarantee or subsidy and do not have discharge or loan forgiveness options. Their higher cost is due to the higher interest rates charged on private loans vs. the rate on federal education loans.

How are a federal loan and a private loan alike?

• Federal loans are offered by the U.S. Department of Education. Private loans may be from nonprofit or for-profit lenders.
• Both are loans — money you have to pay back.
• Both have to be repaid, even if you do not graduate or make as much money as you hoped when you start working.
• How you pay them back becomes part of the credit history you build which affects your future borrowing, such as for a car or house.

When should you consider a private loan for your education?

• Only after you have already applied for all the federal, state and institutional financial aid you can.
• If you did not qualify for financial aid or you need (not "want") more aid than you received.

How should you decide about a private loan?

• Talk with the financial aid office at your school about experiences other students have had with different lenders.
• Contact several lenders to compare terms, conditions and costs.
• Ask questions such as:
  • What is the current interest rate on the private loan?
  • Is it variable or fixed?
  • Does everyone get the same rate on the loan? If not, what determines the rate?
  • Is a surety or cosigner needed (someone who is legally responsible to pay your loan if you fail to pay)?
  • Will the lender making the loan provide service to you after it is made?
  • Can you delay payments while you are in school? Does that increase the total amount you pay back?

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