Private Loans: Frequently Asked Questions

Everything you need to know before you sign that agreement.

By SHARE

Updated 7/1/08

Parents who don't have or don't want to tap home equity can turn to banks or other private lenders to raise college cash.

  1. What are private loans?
  2. How much can I borrow in a private loan?
  3. How much do private loans cost?
  4. Who makes private loans?
  5. How do I get a private loan?
  6. Does everyone get approved for a private loan?
  7. What happens if I get rejected for bad credit?
  8. What happens if I get rejected because the lender just doesn't want to make any private loans?
  9. How is the credit crunch affecting private loans?
  10. Are private loan payments tax deductible?
  11. When do I have to start repaying my parent loan?
  12. What happens if I lose my job or get into other financial trouble?
  13. What are the advantages of private parent loans?
  14. What are the downsides of private loans?

  15. What are private loans?


    Loans made by banks or other private lenders without any government subsidy. They are also called signature loans or alternative loans. The Project on Student Debt has a useful Q&A on private loans.
    Back to top How much can I borrow in a private loan?


    Each lender's terms are different. Some will lend the student's cost of attendance; others have a dollar cap of $40,000 a year or less.
    Back to top How much do private loans cost? *Updated


    It depends. People with top credit can get introductory interest rates at about the Prime Rate. But since the Prime Rate varies, payments will rise and fall. Taxpayers with low and middle incomes can deduct their education loan interest payments, further reducing the cost of the loan.
    Back to top Who makes private loans? *Updated


    Banks, nonprofits, private lenders, and possibly your friends or relatives. Some (but not all) state's nonprofit lender have good deals. To see if your state has a nonprofit lender with a good deal search the Education Finance Council, or try U.S. News's web shopping tool, Simple Tuition. Alternatively, Virgin Money, Fynanz and Greennote have launched new services to help individuals lend to each other at lower rates. But these are fairly new and untested, so they should be approached with caution.
    Back to top How do I get a private loan?


    You must fill out an application with your chosen lender and notify your student's school. The school will want to make sure you have exhausted all other financial aid options before turning to these loans, which are generally rather expensive.
    Back to top Does everyone get approved for a private loan?


    No. Lenders reject applicants with poor credit or poor prospects of repaying.
    Back to top What happens if I get rejected for bad credit?


    If you can find someone with good credit to cosign, which means he commits to repaying the loan if you can't, you can reapply.
    Back to top What happens if I get rejected because the lender just doesn't want to make any private loans? *Updated


    One way to avoid this problem is to stay away from the lenders who've already announced they are suspending or ending their education loan programs. Check FinAid or the National Association of Student Financial Aid Administrators for lists of these programs. If you get rejected once, you can search for another lender by checking with your local nonprofit lender here, trying services such as Graduate Leverage or U.S. News's loan shopping tool, Simple Tuition. If you get rejected by two lenders, save the rejections and present them to your school's financial aid office. Ask to invoke the federal "lender of last resort" program, which is supposed to guarantee access to federal education loans.
    Back to top How is the credit crunch affecting private loans?


    Many low-cost lenders have stopped making loans because investors are charging them very high prices for the funds they want to lend to parents. As a result, many counselors are advising parents to line up a lender, apply for their parent loan, and lock in terms as soon as possible. They recommend you get your application in at least a month before classes start.
    Back to top Are private loan payments tax deductible?


    It depends on your income and how much of the loan you use for education purposes. Generally not for two-parent families with incomes above $135,000.