These are loans made to students by private finance companies: sometimes banks, sometimes specialized education lenders. Advocates of private student loans suggest that they combine the best elements of the different government loans into one: They generally offer higher loan limits than direct-to-student federal loans, ensuring the student is not left with a budget gap. But unlike to-the-parent government loans, they generally offer a grace period with no payments due until after graduation. This grace period ranges as high as 12 months after graduation, though most private lenders offer 6 months.

Student Loan Information: Inside
[ Loans for Higher Education ] [ Private Student Loans ]
[ Disbursement ] [ Perkins Loan ] [ Stafford Loan ]
[ College Consolidation Loan ] [ PLUS Loan ]

Private student loan rates are lower than non-specialized private loans (e.g. "signature" loans) but slightly higher than government loan rates. That may be changing, as pending legislation would raise government student loan rates to similar rates as private student loans.

Most private loan programs are tied to one or more financial indexes, such as the Wall Street Journal Prime rate or the BBA LIBOR rate, plus an overhead charge. Because private loans are based on the credit history of the applicant, the overhead charge will vary. Students and families with excellent credit will generally receive lower rates and smaller loan origination fees than those with less than perfect credit. Beginning a few years ago, money paid toward interest is now tax deductible.

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. Some lenders offer low-interest, 0-fee loans; but these are usually available only to those with high credit scores of 800 or more. Each percentage 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. Origination fees are changing per the Higher Education Act (HEA) July 1, 2006 and the source of payment of the 1% mandated fee may vary by lender.

Private student loan programs generally issue loans based on the credit history of the applicant and any applicable co-signer/co-endorser. This is in contrast to federal loan programs which deal primarily with need-based criteria, as defined by the EFC and the FAFSA. For many students, this is a great advantage to private loan programs, as their families may have too much income or too many assets to qualify for federal aid, but insufficient assets/income to pay for schooling without assistance.

Additionally, many international students studying in the United States can obtain private loans (they are ineligible for federal loans in many cases) with a co-signer that is a United States citizen/permanent resident.

Student loans from private guarantors are based on the contract between student and lender, and do not offer many of the protections that borrowers may expect from government based student loans should they face difficulties during repayment.

The terms for alternative loans can vary greatly from lender to lender and even from the era the loan is made. Some do not even call for expiration of the contract at the death of the borrower, which means the holder of the loan can go after the estate. Deferments, forbearances, and federally subsidized consolidations may not be available or may be more difficult with substantially shorter duration. Such protections of the borrowers are solely based on the contract and the private guarantor and not by Department of Education policies. Yet, borrowers of privately subsidized student loans face the same restrictions to bankruptcy discharge as are government based loans