A private school loan is a financing option for higher education that can either supplement or replace federally guaranteed loans such as Stafford loans, Perkins loans and PLUS loans. Private school loans are unsecured loans with various options for repayment and may offer forbearance and deferral options.
Interest rates are set by the financial institution that underwrites the loan, typically based on the perceived risk that the borrower may be delinquent or in default of payments of the loan. The underwriting decision is complicated by the fact that students often do not have a credit history that would otherwise indicate creditworthiness. As a result, interest rates may vary considerably across lenders.
Eligible loan programs generally issue loans based on the credit history of the applicant and any applicable cosigner/co-endorser/coborrower. This is in contrast to federal loan programs that deal primarily with need-based criteria. For many students, this is a great advantage to private school loan programs, as their families may have too much income or too many assets to qualify for federal aid but insufficient assets and income to pay for school without assistance.
Private loans often carry an origination fee. Origination fees are a one-time charge based on the amount of the loan. They can be taken out of the total loan amount or added on top of the total loan amount, often at the borrower's preference. Each percentage point on the front-end fee gets paid once, while each percentage point on the interest rate is calculated and paid throughout the life of the loan.
A number of financial institutions offer private student loans, including banks, credit unions, and specialized companies, such as Sallie Mae. Borrowers are free to obtain loans wherever they can find the most favorable terms. The terms for private loans vary from lender to lender. A common suggestion is to compare the interest rates and fees from all private school loan lenders. Make sure you fully understand the loan contract and all the costs associated with the loan before accepting the loan.
If you have multiple private school loans, you may want to consider lenders that offer private school loan consolidation programs. Borrowers of privately subsidized student loans may face the same restrictions to bankruptcy discharge as for government based loans. New legislation makes clear that these loans are, like federal student loans, not dischargeable under bankruptcy.
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