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Private Student Loans

Private student loans are college-financing alternatives that can help fill the funding gap when traditional funding from family, loans, grants and scholarships is not enough to cover the cost of your education.

What is a private student loan?

Private student loans do not come from the federal government. Banks and other financial institutions generally provide private student loans. Other private student lenders include non-profit lenders and schools that offer their own loans.

Generally, you should use private student loans as a last resort to fund your education. Most private student loans do not offer the same protections as federal loans, such as income-based repayment plans, forbearance, and discharge upon death. In addition, private loans are usually more expensive (have a higher interest rate) than federal loans.

However, in contrast to federal loans, private loans are subject to state statutes of limitations on collection and, for the most creditworthy borrowers, may offer better interest rates than federal loans.

Two subsets of private education loans are peer-to-peer loans and institutional loans.

Peer-to-Peer Loans

Generally peer-to-peer loans are offered through websites that act as intermediaries between prospective borrowers and loan funders, known as investors. Although these loans are referred to as “peer-to-peer”, funding for the loans can come from large institutions or individual persons. Investors can choose to invest in part of a loan or to provide the entire loan amount requested.

The interest rates on peer-to-peer loans are based on the borrower’s creditworthiness. The interest rates on these loans are generally higher than federal loans; however the most creditworthy borrowers can obtain interest rates that are lower than some of the rates that the federal government offers.

Institutional Loans

Many for-profit educational institutions provide loans, known as institutional loans, directly to students. These loans are generally more expensive than federal loans and can offer fewer protections than other private student loans.

Resources for Colleges and Universities | About the Student Protection Unit | Consumer Alert: Student Debt Relief Companies

 

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