Private Loans

Private loans, also known as alternative loans, can be taken out as a supplement to federal financial aid. Students who have used up their Pell Grant money and taken out the maximum allotted amount in federal Perkins and Stafford Loans may borrow additional funds from a private lender. Private student loans may also be taken out by students who were not awarded federal student financial aid for college.

Interest Rates

Private loan rates rise and fall with the economy and vary from lender to lender. Each student lender sets their own interest rate and chooses what kind of borrower benefits their customers will receive. In contrast, federal loans are fixed at rates determined by the government. The interest rates on private loans are typically higher than those on federal loans, but lenders may choose to lower their rates or increase borrower benefits.

Borrowing Limits

The amount of money a student may borrow in private loans is usually greater than the amount that may be borrowed in federal loans. The chosen lender will be able to tell the student how much money they can borrow. For many private loans, the borrowing limit will be the student’s cost of attendance minus their other financial aid. Student federal loan limits are outlined in the award letter a student receives after submitting a FAFSA. By contrast, for the 2012-2013 year, the maximum Stafford Loan money a full-time dependent undergraduate student may borrow varies between $5,500 and $7,500 annually depending on the year in school. If a student’s parent is eligible to receive a federal PLUS Loan, they may be able to borrow more federally.

Choosing a Student Lender

Students who attend schools participating in the William D. Ford Federal Direct Loan (Direct Loan) Program borrow directly from the government, and will not need to select a student lender for their federal loans. (Due to recent expansion of the program, most if not all schools participate in the program.) When it comes to private loans, schools typically offer preferred lender lists that recommend lenders to students, but it is best to supplement school advice with personal research. Many student lenders are available, and they offer varying interest rates, borrower benefits and repayment guidelines. Schools are required to process loans from the student’s lender of choice without unreasonable delay, regardless of whether the lender appears on the school preferred lender list.

Private vs. Federal Loan Repayment

• Private lenders often require that students begin making payments once the initial disbursement has been issued. In cases where in-school forbearance is granted, interest will generally accrue.
• Federal Stafford payments may be deferred until six months after graduation. Interest does not accrue during this time.
• Parents who take out PLUS Loans must make the first payment within 60 days after the loan is fully disbursed. Graduate students who take out PLUS Loans may defer their loans until graduation, but interest will accrue during this period.
• Both federal and private loans usually have to be repaid regardless of a student’s situation, including bankruptcy. However, federal loans can be discharged under certain rare circumstances.
• Some federal loan forgiveness programs also exist for students who go into certain professions after graduation and meet other requirements based on the program.