A private student loan
is a financing option for higher education in the United States that can supplement, but should not replace, federal loans, such as Stafford loans, Perkins loans and PLUS loans. Private loans, which are heavily advertised, do not have the forbearance and deferral options available with federal loans (which are never advertised). In contrast with federal subsidized loans, interest accrues while the student is in college, although repayment may not begin until after graduation. While unsubsidized federal loans do have interest charges while the student is studying, private student loan rates are higher, sometimes much higher. Fees vary greatly, and legal cases have reported fees reaching 50% of amount of the loan. Although traditionally unsecured, these loans are increasingly secured, so that the borrower must offer collateral or a third-party guarantee of repayment.
Interest rates and loan terms
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 indicate creditworthiness. As a result, interest rates may vary considerably across lenders, and some loans have variable interest rates.
Unlike other consumer loans, Congress made student loans, both federal and private, exempt from discharge (cancellation) in the event of a personal bankruptcy
. This is a serious restriction
that students rarely appreciate when obtaining a student loan.
Financial aid, including loans, may not exceed the cost of attendance.