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Federal student loans make up the overwhelming majority of outstanding student loan debt, but millions of borrowers also take out private student loans.
Yes. Private education loans, also called alternative loans, are originated by private banks and credit unions, as opposed to federal education loans, which are originated by the Education Department and institutions of higher education.
Turning to a private education loan for help with climbing college costs can be tempting. With an online application and the promise of a low interest rate, a private loan often looks easy and affordable.
Federal loans have a fixed interest rate and offer a variety of borrower benefits, like forbearance, deferment, loan consolidation, student loan forgiveness and several repayment plans. And if you default on your student loans, you may be able to undo some of the damage through the federal loan rehabilitation program. (Here’s a brief overview of what student loan default is and what it means for borrowers.)
Private loans generally aren’t as flexible. And unlike federal student loans, private loans often have variable interest rates and require credit checks. So you’ll need a good credit history or a cosigner to land a low rate. If you have less-than-stellar credit, you could end up paying high interest rates. Also, because rates on private loans can fluctuate according to market conditions, whatever interest rate you qualify for could change. (Curious about your credit? You can see where you stand by viewing two of your credit scores on Credit.com.)
The repayment terms on a private education loan vary by lender. With some lenders, repayment begins immediately. Other lenders may allow borrowers to defer loan payments while attending classes, as federal loans do.
You’ll also likely have fewer borrower protections with private loans than you do with federal loans.
Federal loans come with a range of borrower protections mandated in the federal Higher Education Act. For example, with federal Direct, Family Education and Perkins loans, borrowers can postpone payments for up to three years if they suffer economic hardship or unemployment, as long as the borrower meets eligibility requirements for these deferments. Federal loan servicers may also offer forbearance, a temporary postponement of payments, for up to 12 months at a time. Private education loan lenders are not required to offer forbearance or deferment options. Some lenders charge fees to process forbearance and deferment requests and may have shorter deferment or forbearance periods.
A private loan is an option to consider after you’ve exhausted federal lending options (most federal loans, after all, have borrowing limits below the cost of attendance, which private loans do not). When borrowing to pay for your college education, most experts recommend applying for federal loans first and private loans as a last resort. If you’re applying for a federal student loan, make sure you fill out the Free Application for Federal Student Aid (FAFSA). It’s required to get any kind of federal aid, including loans. To land a good deal on a private education loan, you’ll need to shop carefully. Rates and fees vary.
Here are some important questions to ask when shopping for a private loan:
Weigh your financial options carefully. Federal student loans tend to have more benefits and repayment options than private student loans. If you do want to use a private student loan, be sure to get the facts first, and no matter what kind of student loan you decide to get, only borrow as much as you can expect to afford to repay.
Have questions about student loans? Whether you borrowed from a private lender or the Education Department, our experts can help you make sense of them. Post your questions in the comments, and we’ll do our best to answer.
This article has been updated. It was originally published August 24, 2010.
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