What is a Private Loan?

Jodee Redmond

A private loan is one offered to students to help finance the cost of their education. Unlike federal student loans that are backed by the government, a private, or alternative loan, is unsecured. These types of loans may be offered by the school directly or a private lender such as a bank or other financial institution.

When applying for a private student loan, a co-signer's credit history will be checked.
When applying for a private student loan, a co-signer's credit history will be checked.

If you need to get financial assistance to help you pay for your education, it makes sense to consider all of your options. Taking out a private loan to pay for tuition, books, and other educational expenses means that you are not subject to the same restrictions as if you got a Stafford (federal student) loan. That type of financial help has limitations to the amount you are able to borrow. The cap in place depends on whether you are a freshman, sophomore, or junior and above.

Student loans also may have fees attached to them, in addition to the rate of interest you will be charged on the funds. These are known as origination fees, and are charged to process the loan. In the case of a private loan, this fee may be waived by the lender as a way to encourage borrowers to work with them.

A person may need to take out a combination of subsidized and private student loans to finance their education. The school or lender will determine what amount of financing the student is eligible for by taking the cost of attendance and subtracting the amount of other financial assistance available such as federal student loans, scholarships, and work-study programs. The difference left is the amount the student would qualify for, since private loans are given based on need.

The student will still need to show that they are creditworthy before the loan will be issued. A co-signer can be used if the student has little credit history or one that is less than stellar. Keep in mind that if the school you are considering offers private loans, you can deal with your choice of lending institution. Schools are prohibited from telling students that they must deal with a particular bank or lender to get financing help. Under federal legislation, lenders cannot give money to schools or pay employees to as an incentive so that students will be encouraged to visit them for loans.

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