Private Education Loans

Private loans are offered through private agencies or lending institutions rather than the federal government (read: Direct PLUS vs. private loan options). The student is the borrower and an application must be made independently through a lender.

Almost without exception, dependent, undergraduate students do not have sufficient credit to qualify for a private loan without a credit-worthy cosigner. Adding a cosigner will increase the chances of approval and may reduce the interest rate of the loan.

• If a parent has been denied for the Federal Direct PLUS Loan due to credit issues, that parent will not qualify as the cosigner for a private loan.
• Many private loan products now offer cosigner release options; upon consecutive, timely repayment, a student can later apply to have the cosigner removed or released from the loan application. 
• Most private lenders allow students to defer payment while enrolled in school at least half-time, while others prefer if their borrowers pay toward the interest at minimum on a monthly basis. Students should research different loan products carefully before choosing a lender.

Private loans are not federally guaranteed and do not require that you file the Free Application for Federal Student Aid (FAFSA). The yearly amount borrowed cannot exceed the annual cost of attendance minus other financial aid and resources.

Who Can Borrow?

Students who are U.S. citizens, permanent U.S. residents, international students (with an eligible U.S. citizen or permanent-resident co-signer), and, in some cases, non-matriculated students may be eligible.

Before You Apply

• You may qualify for loans or other assistance under the Federal Title IV programs and the conditions under the Federal Title IV loan programs may be more favorable in long-term borrowing than those of private education loans.
• You should inquire about your Federal Direct Stafford Loan eligibility before considering these loans.
• Consider other payment options to keep your costs down and reduce your student loan debt.
• Remember to keep track of your loan debt and the amount you will have to repay when you graduate. The National Student Loan Data System (NSLDS) can help you organize your Federal loans (Stafford, PLUS, Perkins), but will not keep track of any borrowed private loans.
• Determine the total amount of education debt you and your family are willing to accumulate during your entire college enrollment and only borrow what you need. Repayment calculators can help you project estimated payment amounts before you make a decision.

What are the Interest Rates?

Interest rates for private loans may be VARIABLE, which means rates will fluctuate for the life of the loan, or FIXED. 

Variable rates: Most private lenders use Prime Rate (3.25% as of 5/1/12) or 1-month or 3-month LIBOR rate (London Interbank Offered Rate) as a base interest rate. The private lender then calculates an individualized loan interest rate range that includes an add-on percentage based on the creditworthiness of the student borrower and cosigner.

For example, if a private lender states that their loan interest rates range from Prime (3.25% as of 5/1/12) +2.0 to 9.0, a borrower applying for that loan might see their interest rate fluctuating between 5.25% to 12.25% over the life of the loan. The lender will determine your range following loan approval, but knowing the range before applying can help you make a decision.

Fixed rates: The interest rate you are given will not change over the life of the loan.