Private Student Loans: Frequently Asked Questions

If federal loans aren't enough, try relatives, credit unions or banks

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Updated 8/13/2010

Students who aren't getting enough financial aid and government-backed loans 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. Are private loan payments tax deductible?
  9. When do I have to start paying back my private loan?
  10. What happens if I lose my job or get into other financial trouble?
  11. What are the advantages of private loans?
  12. What are the downsides of private loans?

  13. What are private loans?
    Loans made by banks or other private lenders without any government subsidy. These also are sometimes called signature loans or alternative loans. The Project on Student Debt has a useful Q&A on private loans.

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    How much can I borrow in a private loan?

    Each lender's terms are different. Some will lend up to  the student's cost of attendance; others have a cap of $40,000 a year or less.

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    How much do private loans cost?

    It depends on factors such as your credit rating and your college. In the summer of 2010, lenders were offering borrowers with top credit ratings introductory interest rates around the Prime rate. But the lenders were charging those with less-than-perfect credit scores more than 10 percent.  Since most  private loan rates are variable, these rates and payments will rise if other rates rise, as they generally do from time to time. Taxpayers with low and middle incomes can deduct their education loan interest payments, further reducing the cost of the loan.

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    Who makes private loans?

    Banks, private lenders, nonprofits, and possibly your friends or relatives. US News has published a list of websites that help you find private student loans.

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    How do I get a private loan?

    You must fill out an application with your chosen lender and notify your school. The school will want to make sure you've exhausted all other financial aid options before turning to these loans, which are generally rather expensive.

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    Does everyone get approved for a private loan?

    No. Lenders have become picker about who they make loan to. Students who want to borrow money on their own--without getting someone else to "cosign," or  promise to make payments if they don't—will probably have very little luck finding a private loan.

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    What happens if I get rejected for bad credit?

    If you can find someone with good credit to cosign, which means committing to repaying the loan if you can't, you can reapply.

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    Are private loan payments tax deductible?

    It depends on your income and how much of the loan you use for education purposes. Currently, the deduction is allowed only for single people earning less than $70,000 and couples earning less than $145,000.

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    When do I have to start repaying my private loan?

    Each lender's terms are different. Most generally start sending bills right away. Some allow you to wait until you've finished school. But even those who delay billing are adding interest to your total debt, so that when the bills do start arriving, they'll be for a higher total.

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    What happens if I lose my job or get into other financial trouble?

    You can call your lender and ask for help, the same way you would with your mortgage and credit card companies. But beware: Even if you are allowed to skip some payments, lenders typically keep adding on interest, so you'll owe a lot more when you start repaying again. In addition, filing bankruptcy probably won't help you escape private student loans, since bankruptcy courts will only relieve borrowers who can prove the payments are an "undue hardship." The National Consumer Law Center has lots of good advice.

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    What are the advantages of private loans?

    For some students, private loans are the only way they can fund their education.

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    What are the downsides of private loans?

    Private loans tend to be very expensive. They can burden students with huge bills after they graduate. Worse, student loans are not like  credit card debt and mortgages, which can be canceled if you file for bankruptcy. Most bankruptcy courts will not cancel them unless your situation is extremely dire. In addition, most private loans come with floating interest rates, so payments will rise if interest rates rise, which they generally do from time to time.
      
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