What are Private Student Loans?

Mary McMahon

Private student loans are student loans offered through private lenders, instead of lenders that work with the government. Many banks and other financial institutions offer private student loans to their customers. These loans usually come with less favorable terms than government loans, but they can be useful for students who need emergency funding, cannot get enough aid to support themselves, or have unexpected expenses that do not qualify for government-supported financial aid.

Student loan repayments are usually deferred until after graduation.
Student loan repayments are usually deferred until after graduation.

When students receive financial aid awards, the awards include all government loans the student is eligible for along with grants and scholarships. Information about private student loans may be provided by request. Some schools have existing relationships with lenders and may advise students to work with those lenders, but students are not required to work with the school's lenders and they can opt to pursue funding from other sources.

People may be able to obtain a private student loan with no cosigner if they have a strong credit rating.
People may be able to obtain a private student loan with no cosigner if they have a strong credit rating.

Private student loans may be disbursed to the school for payment to the student, or directly to the student, depending on the terms. In addition to students, parents can also take out such loans. Interest rates tend to be higher and subsidized interest is not available with private loans. Students may also immediately enter repayment, unlike with government loans, where repayment is classically deferred until after graduation.

To apply for private student loans, students will need to submit documentation showing that they are good candidates for loans. This can include credit history, income, and other supporting information, along with proof that they are enrolled in school. The lender will review the student's application to determine whether a loan should be granted and make decisions about the terms. Unlike government loans, private loans are not guaranteed and lenders do not want to extend loans to people who are poor credit risks.

The financial aid office must usually approve a student application and provide an endorsement for a private loan. This is designed to ensure that students do not take out excessive loans while in school. Lenders may have limits such as mandates that students not take out more than their total cost of attendance, minus existing student aid. Students are not required to account for how the money is used and may do anything from buying textbooks to paying for study abroad.

If students feel that their financial aid packages are not sufficient for their needs, it is advisable to appeal the award before turning to private loans. Many financial aid offices are willing to work with students to help them get the best funding package.

A student loan application form.
A student loan application form.

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